Over the next few days, both the California and New York state legislators will enact an increase in the minimum wage to $15 an hour, set to come into full effect by 2022. Catching the attention of individuals across the socio-economic spectrum, the minimum wage argument is a considerably emotional one, and certainly has yielded dynamic academic perspectives. If you focus on the economic theory, there are two major viewpoints to consider when forming an opinion on the issue:
First, with a national money supply that is consistently subjected to inflationary targets by the Federal Reserve, the value of the money that you and I spend diminishes over time. (The Federal Reserve targets a minimum inflation rate of 2 percent for the USD through increasing the amount of cash or credit it creates.) In order to stay consistent with the cost of living, one should increase wages within low skilled labor markets. Economists have consistently produced empirical findings that show no statistically significant short run negative impacts--such as a damaging increase in production and labor costs to the producer or job loss--within the low skilled labor market that occur as a result of increased minimum wage. All of these findings are outlined in a study conducted by two economists out of UC Berkeley. While this study did demonstrate minimal evidence of the above impacts, it did show significant evidence for rigidity in the low skilled labor force, leaving little room for growth. What are the implications of this? When a labor market is rigid this means employment growth will remain stagnant and possibly degrade in the long run; firms are neither hiring nor firing. This first argument is often the pro minimum wage-increase argument, supporting an inflation tied wage rate for those in the low skilled labor market.
Where the first philosophy focuses on an immediate solution, the second focuses on the long-term effects of the policy. This argument simply states that while a minimum wage increase supports low skilled labor in the short run, it will prove detrimental to the very population the policy was intended to serve over time. Economists refer to the minimum wage as an example of a price floor.
Suppose the owner of firm A produces shoes, and she has two employees, Jim and Jan. Jan makes eight shoes in one hour, Jim makes 11 shoes in one hour; thus, Jim is paid $12 an hour, and Jan is paid $11 an hour, as Jim produces more value for the owner than Jan. In a price floor scenario of $15 an hour the cost of labor and production will go up (because the owner must absorb the loss of $4/hr for Jan and $3/hr for Jim), and in the short run the owner will cut Jan’s hours--she produces less value for the owner. In the long run, however, there is now an incentive for the owner to simply replace Jan with a machine that can make shoes at the same rate as Jim. In order to offset the cost of the new technology, she will be less likely to hire new employees.
However, suppose a price floor had not been enacted? According to economist Dr. Boudreaux out of George Mason University, firms have already demonstrated a voluntary increase in wages for employees who are capable of producing more value. “Ninety six percent of American workers today earn an income higher than the minimum wage”. If a worker is capable of producing his or her own value for firm C and the owner is not willing to compensate that worker equally then that worker will simply move to firm D who does compensate them equally for their value producing labor. Note, that according to a recent study by Dr. Meer and Dr. West, economists out of MIT and Texas A&M, in the long run a price floor will create a decrease in employment opportunities through increased use of technological alternatives. The study showed that the demographic of individuals most likely to be affected are poorly educated youth under the age of 25 years old. These effects have been demonstrated on several accounts throughout history, and have most recently materialized with the firm McDonalds. In 2015 Seattle raised their minimum wage to $15 an hour, only be followed by a swift move by the company to replace front of house workers by machines which place orders instead. Finding a conclusion for this argument remains difficult, as the Federal Reserve will continue to target inflation, which primarily hurts those who are poor and possess a limited skill set.
