Raising the minimum wage is a hot-button issue, politically speaking — and rightly so, as it has a real impact on everybody’s finances. So what are the pros and cons of raising the minimum wage?
Raising the minimum wage could have immediate effects on the lives of low-wage hourly workers by helping them to move out of poverty and keep up with inflation. Some economists argue that other pros of raising the minimum wage could include increased consumer spending, reduced government assistance (and increased tax revenue), and stronger employee retention and morale.
Alternatively, other financial experts point to the cons of raising the minimum wage, including potentially increasing the cost of living, reducing opportunities for inexperienced workers, and triggering more unemployment.
Learn more here, including:
• What is the federal minimum wage?
• What is the purpose of the minimum wage?
• What are the pros and cons of raising the minimum wage?
• What are the likely effects of raising the minimum wage?
What Is the Federal Minimum Wage in 2023?
The federal minimum wage in 2023 is $7.25 per hour. The last time that minimum wage increased was on July 24, 2009, when it grew $0.70 from $6.55 an hour. This was part of a three-phased increase enacted by Congress in 2007.
It’s worth noting that tipped employees (say, waiters) have a different rate. The current federal tipped minimum wage is $2.13, as long as the worker’s tips make up the difference between that and the standard minimum wage.
Some states have their own minimum wage laws with a higher (or lower) starting wage than the federal minimum. In such states, employers must pay out the higher of the two minimum wages.
Here are some minimum wage fast facts:
• The highest current minimum wage is in Washington, D.C., where it is $16.10 — and will go up to $17.00 on July 1, 2023.
• According to a 2022 Oxfam American report, 51.9 million US workers, or a little less than a third of the workforce, make less than $15 per hour, and many are making the federal minimum wage of $7.25 per hour or less.
• While the minimum wage has been stagnant since 2009, inflation has not. The spending power of $7.25 in 2009 is equivalent to $10.11 in 2023. This means that $7.25 can buy today about 7!5 of what it could buy in 2009.
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What Is the Purpose of the Minimum Wage?
So why was the minimum wage originally created? The minimum wage was an idea that gained traction during the Great Depression era. During that time, President Franklin D. Roosevelt worked with Congress to pass the Fair Labor Standards Act of 1938, which officially established the minimum wage. Even then, politicians bickered over the hourly rate and potential impacts on the economy, and the final legislation (25 cents an hour) was not what FDR originally had in mind.
Regardless of the final number that Congress landed on, FDR’s vision for this minimum wage law was to “end starvation wages and intolerable hours,” according to the Department of Labor. The Legal Information Institute of Cornell Law School paints an even clearer picture: “The minimum wage was designed to create a minimum standard of living to protect the health and well-being of employees.”
In short, early proponents of the minimum wage legislation intended for it to be a living wage. And as the Kenan Institute of Private Enterprise points out, in today’s economy, “there is a stark difference between the federal minimum wage and a living wage.”
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Benefits of Raising the Minimum Wage
Many economists point to several pros of raising the minimum wage, including the following:
Helping Families Get Out of Poverty
Even without minimum wage increases in today’s market, inflation is skyrocketing. In July 2022, it was up 9.1% year-over-year, a four-decade high. The average American family is likely trying to cut grocery costs, gas prices, and utility bills.
A nonpartisan analysis conducted by the Congressional Budget Office found that raising the federal minimum wage to $15 an hour would reduce the number of people in poverty by nearly 1 million within a decade. And that same report indicates that earnings could increase for up to 29 million workers by 2031.
While raising the minimum wage will not stop inflation (in fact, it can have the opposite effect), it can help families more easily afford basic necessities. It can also fulfill the legislation’s original intention of eliminating starvation wages and establishing a minimum standard of living.
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Increasing Consumer Spending
Multiple studies over the last decade have demonstrated that low wage earners are more likely to put their income directly back into the economy. That’s because low wage workers spend a larger portion of their budget on immediate needs, like food, clothing, transportation, and shelter.
Increased consumer spending is a boon to the economy, as it is a positive economic indicator reflecting consumer confidence in the market — and brings more revenue to small businesses and corporations alike.
Increasing Federal Revenues
The CBO’s report found that federal spending would both increase and decrease if the minimum wage were raised. While those with newly raised wages might rely on government assistance less (for example, the CBO predicts reduced spending on nutrition programs like SNAP), workers who lose their jobs as a result of minimum wage increases will put an excess burden on unemployment.
However, increased tax revenue from higher wages should boost federal revenues overall, per the CBO report.
Increasing Employee Retention and Performance
The theory of efficiency wages suggests that higher-paid employees are more motivated to work harder and thus produce more goods and services faster. If that theory is true, increasing the minimum wage could help businesses become more profitable.
Further, employees are more likely to stay with a company longer if they earn good wages. The longer an employee is with a company, the more skilled that employee can become — and thus more valuable to the business.
On top of that, employee turnover is expensive. Replacing an employee with a new candidate can cost up to 150% of the worker’s salary or possibly more. In many cases, it might be cheaper for a business to pay an employee a better salary to keep them from leaving. It could be cheaper than recruiting and training a new worker to replace them after they’ve left.
Cons of Raising the Minimum Wage
There are multiple downsides to raising the minimum wage to consider when debating this policy as well:
Increasing Labor Costs and Unemployment
The largest concern with raising the minimum wage is increased labor costs. If the minimum wage increased to $15 an hour, businesses would suddenly need to give raises to everyone making less than that.
But if some employees were making $10 to $15 an hour, they might not be thrilled to hear that other workers with less tenure and experience are suddenly being paid the same. And employees who were making $15 an hour or slightly above it may also expect a raise once entry-level workers are bumped to $15.
The problem? Not all businesses can afford that. Restaurants, for example, operate at a 3% to 5% profit margin. Increasing labor costs could shrink (or eliminate) their margins, meaning they might have to let go of some staff or go out of business.
The report from the CBO supports this data; it estimates that raising the minimum wage to $15 could result in the loss of roughly 1.5 million jobs within a decade.
Another aspect of this is that if employers have to raise their wages, they might well raise their prices, passing along the increase to their customers.
Increasing Cost of Living
As businesses adjust prices to accommodate higher labor costs, consumers should expect that their dollars won’t go as far as they used to. That is, many economists argue that minimum wage is correlated with inflation. Some say that if business owners have to raise the minimum wage they pay workers, they will pay along those costs to their customers, ratcheting up their prices and contributing to inflation.
That said, other economists paint inflation as the boogeyman of the minimum wage debate. For example, Daniel Kuehn, a research associate at The Urban Institute, said that, though increasing wages will increase the cost of goods and services, it’s not really a 1:1 ratio. In other words, it won’t be “enough for consumers to really feel a burn in their wallet.”
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Decreasing Opportunity for Inexperienced Workers
Typically, employees without specialized skills — first-time workers in high school and college, people with disabilities, and the elderly — fill some minimum wage jobs. But as employers are forced to pay workers more, some argue that companies will look for employees with more experience (or will invest in automated technology). This could make it more challenging for unskilled laborers to find work.
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Handling the Effects of Raising the Minimum Wage
Businesses may need to adjust practices to pay employees a higher hourly rate if the federal or state minimum wage increases. Here are a few ways company leaders might be able to handle the effects of increased wages:
• Raising prices: If a company’s labor costs go up, the company may need to offset those expenses with higher prices for its goods and services. Paying attention to what competitors are doing and how consumers are reacting to price hikes can be helpful in determining how much you raise prices.
• Working with independent contractors: Independent contractors might be more affordable than full-time employees for specific job duties. For instance, the employer would save on paying benefits. Before establishing an independent contractor model at your business, it’s a good idea to research the guardrails around independent contractors, as laid out by the IRS.
• Automating some positions: Technology continues to offer new ways to automate certain business functions, which may allow employers to reduce headcount, avoid future hires, or reassign existing employees to more revenue-generating work.
• Reducing hours or cutting costs: Business owners who do not want to lose any employees might be able to reduce overall hours or find other ways to cut costs instead (perhaps a less expensive benefits package, for instance).
• Getting creative: Offsetting increased labor costs can be as easy as generating more business. But then generating more business isn’t always so easy. Some creative ideas to get customers in the door could include loyalty programs or offering low-cost alternatives for budget-conscious customers.
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The Takeaway
The original intention for establishing a minimum wage was to enable workers to have a standard of living that allowed for their health and well-being. While opponents may still argue over “living wage vs. starting wage,” many signs point to today’s federal minimum wage not being enough to have a basic standard of living. Raising the minimum wage has several pros, but it’s important to remember that there are many negative effects to minimum wage increases as well. The economic solution may not be simple, but it will likely be a debate that’s in the spotlight today and in the near future.
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FAQ
How does increasing the minimum wage affect the economy?
Some economists argue that increasing the minimum wage encourages consumer spending, helps families out of poverty, and boosts tax revenue while reducing tax-funded government assistance. Other economists point out the cons of raising the minimum wage, like increased inflation and unemployment.
How does decreasing the minimum wage affect the economy?
In general, the discussion around minimum wage is about increasing it. Economists and politicians are not considering decreasing the minimum wage; doing so would send more families into poverty and decrease consumer spending.
Why are state minimum wages different?
States are able to enact their own laws that supplement or deviate from federal laws. Many states with a higher cost of living, like California and Washington, have increased their minimum wage to roughly double the federal minimum. If a state’s minimum wage differs from the federal minimum wage, employers must pay the higher of the two rates.
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