Minimum Wage Increase Has a Maximum Impact

It sounds like good news for the low-income workers and their families whenever the government increases the minimum wage. The United States Congress adopted the Fair Labor Standards Act in 1938. Congress created the minimum wage toward the end of the Depression era to ensure a "minimum standard of living necessary for health, efficiency, and general well-being for workers” (Wages). The Fair Labor Standard Act establishes minimum wage, overtime pay, recordkeeping, and child labor standards affecting full-time and part-time workers in the private sector and in Federal, State, and local governments. Covered nonexempt workers are entitled to a minimum wage of not less than $5.15 an hour.

Minimum wage is an example of government intervention. The government has put a minimum on the dollar amount that employers can pay their employees. Unfortunately, when we implement solutions like raising the minimum wage, it is too late to actually fix the problem, so in most cases it has effects that we cannot foresee as it is a reaction instead of a prevention method. However, upon closer analytical examination, it can be seen that raising the minimum wage has a perverse effect and examining the minimum wage law itself can show a dynamic effect when raising the wage floors.

On the surface minimum wage laws seem like the best prescription to treat poverty and improve living standards of the working poor. Advocates first defense of the minimum wage floor and its increase is that the firm can pass the costs occurred by the wage hike to its customers. Another defense is that advacates deny claims of links between the minimum wage and the impacts upon employment, and suggest that in any event, greater social benefit derives from minimum wage laws. For example, Santa Fe employers affected by the city minimum-wage law increased the number of employees overall by .35 employees when compared to the year before the ordinance took effect. During the same period, overall employment levels in Albuquerque fell by 2.4 employees without an increase in minimum wage (Lopez).

Promoters of minimum wage laws are also taking positions that such laws alleviate poverty and improve the conditions of life of the working poor (“Making Work Pay”). According to the Department of Labor, nearly 6.45 percent of the labor force is earning minimum wages. By having minimum wage laws the government is trying to ensure that everyone has a better standard of living and a more equal chance of competing with the higher income families and a fairer chance to improve their economic condition. According to the Employment Policies Institute, the average family affected by the minimum wage has an annual income of $43,000 because seven out of 10 minimum-wage workers live with a working spouse or relatives. Furthermore, the average income of minimum-wage workers increases by 30% within one year of employment on the basis of learned skills. Wage increases due to increased skill levels explain the fact that only 2.8% of workers over the age of 30 are receiving the minimum wage (Crane).

The argument that the firm can pass the costs occurred by the wage hike to its customers is not a valid one. Robert Shapiro, lead economist at the Progressive Policy Institute says that about 80 percent of the costs of an increase in the minimum wage are passed on in the form of higher prices. A survey of small businesses found that after a wage increase 28 percent raised prices, 26 percent postponed expansion plans, 14 percent terminated at least one employee, and 9 percent did two of the preceding. Many firms have also turned to automation to reduce the threat of wage increases (Hamond & Hogan).

If minimum wage is raised, unemployment will grow. The reason for this is that the supply exceeds the demand. A wage is simply a special type of price, specifically the price of labor services. The most universally accepted application in economics is the Law of Demand. When other things are held constant, if prices go up, buyers will buy less. Thus if labor becomes more expensive, employers will hire fewer workers (Posner 346). That is because some workers who would have been profitable to hire become unprofitable. A second well-accepted proposition is the Law of Supply. The higher the price suppliers receive, the more they will supply. Putting the two laws of economics together, higher wages increase the number of workers willing to work but decrease the number of workers employers will hire. Artificially raising wages by governmental law creates a surplus of labor, better known as unemployment.

Low-wage workers are most affected by these laws. Some workers will gain from the wage increase through higher income; however, these gains come at the expense of other workers. Groups with the lowest levels of productivity suffer the greatest loss. Low-wage workers will be forced into second-best employment