The Impact of Raising Minimum Wage on the United States Economy Essay

Introduction

A fierce debate exists between proponents and opponents of raising the minimum wage. The former argue higher minimum wages stimulate economic growth through increased productivity, improved consumer spending, and reduced turnover and absenteeism that allows businesses to attain their bottom lines. Challengers of hiking of minimum wage contend the labor market, like any other market, is affected by the principle of demand and supply - demand decreases with an increase in price. They, therefore, argue higher minimum wage causes unemployment because employers attempt to save on labor. Also, they claim raising minimum pay increases firms' production expenses, which affect businesses profitability. However, a review of the existing literature indicates raising minimum wage improves productivity, increase consumer spending, and alleviate low-income earners from poverty, which stimulate economic growth.

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LITERATURE REVIEW

Margineana and Chenic (2013) paper correlate theory and empirical evidence on the effect of increasing minimum wages on employment and unemployment in the U.S. and some European countries between 2008 and 2013. The paper indicates that a hike in the minimum wage has insignificant consequences on the labor market because factors such as low turnover, organizational efficiency, the decrease of high-earners wages, and insignificant prices increases offset it (98). Also, unemployment is a rigid macroeconomic variable and a lagging indicator that has a high inertia, and a low elasticity (101). Further, a minimum wage is an income and social issue, which does not relate to the real economy (101). Margineana and Chenic conclude that minimum wage is a limitation on the labor market whose effects are felt by other markets (101).

Fernandez-Villaverde (2018) claims wages are puzzling. The author posits that the labor market is a perfectly competitive market, which deals with the exchange of a specific type of labor in a specific place (3). That is, when analyzing the market, one can only consider low-skill employees, say, in the city of Philadelphia (3). If one analyses both the high- and low-skilled workers, the result becomes less realistic (3). Fernandez-Villaverde argues the standard principle of demand and supply should decide wages (3). Therefore, an increase in wages should increase labor supply while demand decreases (3). Also, if the minimum wage is set above the market-clearing level, unemployment occurs. But studies on effects of increasing minimum wages show disproportional relations between hiking minimum wages and unemployment. For instance, Brown, Gilroy, and Kohen (1982 as cited in Fernandez-Villaverde 2018), state a 10% increase in minimum wage results in approximately 1-3% loss in adolescents' jobs - effects that are comparatively less substantial (8). Additional studies claim a 1% increase in wages cause a 1.5 % chance of workers losing jobs. According to Sorkin (2015 as cited by Fernandez-Villaverde, 2018), the elasticity in reaction to temporary minimum wage increase is -0.002 while a permanent increase has an elasticity of -0.252 after six years (9). This discrepancy is because higher wages push firms to adopt new production technology to cut cost in the long-run (9). The paper also shows increasing minimum wage by 10% increase firms' exit rate by only 0.4% (9). Fernandez-Villaverde's conclude low-income earners benefit from raising the minimum wage, but the contribution of the increase in minimum wage in labor market allocation is minimal, thus, empirically irrelevant (10).

Cooper and Hall (2012) claim an increase in minimum wage helps low-income workers. They argue increasing minimum wage allow such workers to spend their new income immediately, which generates a positive outcome on GDP and improve employment modestly. The authors, however, proposed the effects depends on gender, age, ethnicity, level of education, working hours, and family income and composition. Women are the majority beneficiaries because they make up 54.5% of minimum-wage earners, and 87.9% of low-income workers are above 20. Both minority and non-majority employees are affected in varying degrees. 56.1% are whites, 23.6% Hispanics, 14.2 blacks, and 6.1% are Asians and others. Those with low educational qualifications also benefit considerably. A significant impact is similarly felt by those who work from 20 to 35 and above hours per week. Those with low income are the next biggest recipients same as families made of parents, children, or married couples. An increase in minimum wage, hence, positively boost the income of a diverse multitude of the U.S. workers, which has many economic benefits including a boost in income of low-wage workers, an injection of billions of dollars into the labor market, and incidental spillover benefits to those who earn just over the minimum wage. According to Izzo (2011 as cited in Cooper and Hall, 2012), the increase in consumer spending increases the demand for goods, which result in more hiring.

Manyika et al. (2018) argue that the U.S. economy is faltering from low demand, but higher wages can ease this burden. Because low demand is the most critical factor affecting productivity growth, an increase in demand would stimulate economic growth in the U.S. Slow growth in wages is the principal cause of reduced consumer power. An increase in wages causes consumers' choice to shift towards high-value, sophisticated goods. When demand for these goods increases, all people involved become more productive, which increase the overall quality of living.

Maclay (2016) cites a UC Buckley study on the effect of an increase in the minimum wage in New York. The study indicates raising the minimum wage to $15 an hour would improve earnings of 3.2 million New York employees by an average of 23% without any loss of jobs. Therefore, 37% of low-wage workers in New York will enjoy higher incomes whereas high-wage employees' incomes will increase by $4,900. The majority of beneficiaries are employees in retail (18%), health care and social assistance (16%), and restaurants (14%) industries. The overall payroll cost increase by 3.2% because labor constitutes only one-fourth of businesses' operational costs. Also, employee productivity rise and turnover fall, thus, firms save in recruitment and retention costs. These savings offset one-eighth of the increased payroll costs. Therefore, a rise in the minimum wage would result in extensively-shared success in New York.

ANALYSIS

From the above literature, it is evident the labor market does not conform to the standard principle of price elasticity of demand and supply (Fernandez-Villaverde 3). Consequently, an increase in minimum wage does not, imply a decrease in demand for labor. This event happens because other factors such as low turnover, organizational efficiency, the decrease of high-earners wages, and insignificant prices increases mitigate the effects of higher labor costs (Margineana and Chenic 98). Companies also apply risk aversion tactics by automating their production activities and hiking prices slightly to counter the higher payroll expenses. The automation helps firms reduce production cost, improve organizational efficiency, and increase productivity (Fernandez-Villaverde 9).

An increase in sales due to higher consumer spending, which drives demand, also cushion the impact of the high production costs (Cooper and Hall; Manyika, et al.). Though r aised payroll expenses raise variable costs, the gains in productivity, employee retention, and enhanced sales mitigate the higher labor costs (Maclay). Therefore, firms' economic profits do not suffer significantly due to an increase in minimum wages. That is because the extra cost of labor is mitigated by the lack of an increase in implicit costs of training new employee since workers' turnover is low. The low exit rate of 0.4% of firms relative to an increase in the minimum wage of 10% proves the insignificance of the impact of the minimum wage increase on economic profits (Fernandez-Villaverde 9).

Because increasing minimum wages affect low-income earners, it helps redistribute income in the U.S., which helps improve the quality of life of poor households. Raising the minimum wage, consequently, result in a fair distribution of purchasing power meaning Americans can enjoy prosperity in a more widespread manner (Manyika, et al.).

CONCLUSION

People opposing the raising of the minimum wage claim it causes unemployment and increases production costs. However, studies show improving minimum wage has minimal impact on employment and unemployment. Further, the many positive effects high income contributes to an economy counterbalance the surge in production costs. That is because companies enjoy more sales from increased consumer spending, improved workers' productivity, organizational efficiency, and low turnover. Overall, the increase in the supply of money among consumers due to higher income stimulates economic growth. Last, paying low-wage earners (who mostly include women, youth, lowly-educated) amount to redistribution of wealth and improves living standards.

Works Cited

Cooper, David, and Douglas Hall. "How Raising the Federal Minimum Wage Would Help Working Families and Give the Economy a Boost." Economic Policy Institute, 14 Aug. 2012, www.epi.org/publication/ib341-raising-federal-minimum-wage/.

Fernandez-Villaverde, Jesus. "The Economics of Minimum Wage regulations." 10 Feb. 2018, University of Pennyslavia.

Maclay, Kathleen. "Study Sees Positive Impact of Raising New York's Minimum Wage to $15 an Hour." Berkeley News, 10 Mar. 2016, news.berkeley.edu/2016/03/10/study-sees-positive-impact-of-raising-new-yorks-minimum-wage-to-15-an-hour/.

Manyika, James, et al. "The U.S. Economy Is Suffering from Low Demand. Higher Wages Would Help." Harvard Business Review, 21 Feb. 2018, hbr.org/2018/02/the-u-s-economy-is-suffering-from-low-demand-higher-wages-would-help.

Marginean, Silvia, and Alina S. Chenic. "Effects of Raising Minimum Wage: Theory, Evidence, and Future Challenges." Procedia Economics and Finance, vol. 6, 2013, pp. 96-102.