Does America Need a Federal Minimum Wage?

Authors: Daniel Ho & Saumya Rajawat Region Head: Saumya Rajawat

Editor: Harsh Didwania

Abstract

In the United States, a statutory minimum wage was first championed in 1938 by then-President Franklin D. Roosevelt. Today, it has been dubbed “the mother of all economic debates”. After a brief feature in Biden’s ambitious 1.9 trillion budget plan, the issue was once again catapulted to the forefront of American politics. Federal minimum wage last hit a peak in 1968 at $1.60 per hour, or $11.53 in 2019’s prices. Since then, the federal minimum wage has been decreasing in real terms, just as several empirical studies challenging classic economic theory have emerged. Is it time to revise our assumptions?

What The Traditional Theory Tells Us

Conventional wisdom says that as you raise the artificial wage level above the equilibrium level, there will be an excess supply of labour. Unemployment ensues due to two reasons. Firstly, as wages as a cost of production have gone up, employers respond either by automating the task or looking for labour overseas. Secondly, the increase in expenses forces companies to raise their prices to maintain the same level of profit, which further decreases the demand for labour (Depersio, 2020). As unskilled labour is more prone to the substitution effect, it is the lower-income workers who will bear the brunt of the impending layoffs (Neumark, 2018). Furthermore, a minimum wage may also lead to wage-push inflation where consumer goods and staples become less affordable. All these present a significant challenge from a policymaker’s perspective as a minimum wage may hurt the very people it is designed to help.

Is There Side to The Debate?

Despite the traditional economics theory’s gloomy response to a minimum wage, the idea might not be completely meritless. Research studies have shown that raising the minimum wage may not affect employment negatively if the raises are under 50% of a country’s median income level (The Economist, 2013). In certain industries, a key dependency on workers or the effort required in sourcing alternatives can make the labour demand inelastic, rendering mass unemployment unlikely (Belman & Wolfson, 2014). Moreover, in cases where the wages are repressed below the market equilibrium, raising the pay may have a positive impact on employment levels (Card & Krueger, 1993). This often happens in monopsonist labour markets. In contrast to a monopoly where a single seller dominates, in a monopsony, a single buyer purchases from multiple sellers. As the only price-taker in town, a monopsonist firm may set prices artificially lower as in the case of restaurants who are the main employer in the Card & Krueger study (The Economist, 2020). Therefore, a minimum wage merely raises wages closer to the equilibrium level, reducing unemployment.

The People, The Workers

Raising the minimum wage could be an impactful decision for the millions of workers in low-paid jobs, 59% of whom are women. Even more significant would be the effect on systematically disempowered groups like Black and Hispanic women who are overrepresented in such jobs. But the benefits are not so definitive. Though minimum wages can improve employee well-being and help reduce income inequalities, there can be an impact of external factors such as working hours or differences in acceptable living standards on the results (Gülal & Ayaita, 2018). Take the case of Seattle, where after the enactment of a gradually increasing $15 minimum wage by 2021, individual employees were able to earn higher weekly earnings but through working multiple shifts in different jobs (Jardim et al., 2018). Moreover, there is also a question regarding the compliance of these laws, especially by companies employing immigrant labour - people who might be more afraid of authorities than the companies exploiting them. That leaves us with an understanding of the imagined welfare for individual employees, but not of how it might work in a system with numerous social complexities.

State vs Federal Laws

Even if we accept the merits of a wage floor, the federal minimum wage may not be the best solution. First, it is becoming increasingly obsolete when a total of twenty-nine states have a local minimum wage above the federal minimum wage of $7.25 (National Conference of State Legislatures, 2021). In 2010, the percentage of state minimum wages that were binding was around 40% of all hours worked, today it is closer to 90% (The Economist, 2019). Individual states have long begun to recognise the inadequacy of the federal rate. Having said that, a federal minimum wage is too blunt an instrument to account for the specific economic conditions of each state. For a start, using the median rent prices per month as a proxy for the cost of living, we can see that costs vary wildly from $998 in Alabama to $2518 in California. Not surprisingly, the annual mean wages vary to reflect these differences (Blakely-Gray, 2020). The minimum wage is meant to guarantee a minimum standard of living. However, a standard rate across all fifty states would likely emphasise the economic disparities among states and might not help the diversity of individuals that reside in them.

The Road Less Travelled By

Studying the effects of a minimum wage in real cases might almost be as difficult as actually passing the legislation in Congress. The existing debate on the issue shows the contradictions in multiple results, and isolating factors in empirical studies can be a complex, vexatious task. Yet, there seems to emerge a consensus that evaluating a minimum wage should be a responsibility of economic commissions, and not a politically motivated cause (Economist, 2013; Dickens, 2015; Reeves, 2016). The inconsistency in minimum wage trends caused by political decisions may be better off replaced by a regular appraisal on the wage rates undertaken by an independent committee of experts.

Although the $15 minimum wage provision has failed to make it past the Senate and we might be far from seeing any legislative changes on the issue soon, it has reignited the national conversion around wealth and inequality. At the time of a pandemic when unemployment and the plight of low-paid workers have become an unfortunate truth about the country, further studies and active research on the field might be needed more than ever.

References

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