My very first job was working at a little mom-and-pop bagel shop in suburban Baltimore. I was 15, and I was thrilled to be earning a dollar more than the then-minimum wage of $4.25. Over that summer of 1994, I worked just over 30 hours a week making bagel sandwiches, wiping down tables, and running a cash register.
Something I learned early on, however, was that the mom and pop who owned the bagel shop were not sweet and cuddly. They paid the teenagers who worked there a decent wage, and generally treated them well. But the adult employees — the ones I thought of as lifers, because they depended on their paychecks to live — faced Pop’s consistently bad temper and worked for just about the same amount of money as the kids did.
This was an important early economics lesson for me: when you have a captive workforce, it’s easier to get away with treating them poorly.
The teenagers were likely to leave their jobs if Pop screamed in their faces like he did with the adults, so he kept his temper in check. The adults were dependent on their low wages (which were admittedly still higher than the minimum), so they weren’t likely to ask their volatile boss to stop yelling — let alone for a raise.
As I listen to the arguments on either side of the minimum wage debate, I think back to that experience. I’ll be honest: I tend to believe that raising the minimum wage is a good idea, in part because I can remember the names, faces, and stories of my adult co-workers who were in an untenable employment situation. I do recognize, however, that raising wages is both a global and a personal issue.
For that reason, this week and the next, I’ll be looking in-depth at the pro and con arguments of raising the minimum wage to $10.10 per hour from its current position at $7.25. This week, I’ll look at the oft-talked about benefits, and whether they’re as clear cut as they seem.
Here are some of the expected benefits of increasing the minimum wage:
Stimulating the Economy
One theory about raising the minimum wage is that it will help to boost the American economy as a whole. It seems perfectly logical: when workers have more money in their pockets, they spend more.
And according to economists, for every $1 per hour increase in the minimum wage, adult workers earning the minimum spend an additional $700 per quarter.
However, it’s not just that these earners spend the money they make. These workers apparently take on more debt in the short term in order to purchase durable goods (like cars), and it is this increased borrowing that stimulates the economy.
But considering the fact that banks have seriously tightened their lending standards for low-income borrowers since 2008, a minimum wage hike may have no effect on the economy.
Add to that the fact that employers may hire fewer workers, lay workers off, or raise prices in reaction to the minimum wage hike, and the potential stimulus may be even further blunted.
Basically, without knowing how employers and lenders will react in the wake of a minimum wage hike, it’s impossible to know how much it would stimulate the economy.
Improving Entitlement Programs
Raising the minimum wage offers two potential benefits for entitlement programs like Food Stamps and Social Security. First, raising the minimum wage will theoretically lift many of the working poor above the poverty line, meaning they’ll no longer need to rely on food stamps or other assistance programs. Secondly, an increased minimum wage increases taxable income — meaning there’s more money going towards programs like Social Security.
However, these two potential benefits aren’t necessarily straightforward. For instance, the Congressional Budget Office has reported that only 19% of the increased earnings due to the hike would go to families below the poverty threshold — and 29% of the increased earnings would go to families earning more than three times the poverty threshold. These would be the teenagers (like my prior self) who are earning money in low-wage jobs.
The CBO concludes that a minimum wage hike would raise the wages of 16.5 million, and lift about 900,000 people above the poverty threshold — but there are roughly 45 million who are projected to be living under that threshold during the wage hike timeframe.
In addition, while raising individuals above the poverty threshold is certainly a good thing, low-wage workers may find themselves in the unenviable position of earning too much to qualify for assistance, but not enough to keep afloat on their own.
Decreasing the Turnover Rate
My boss at the bagel shop certainly understood the importance of low turnover: the more turnover you have, the more you spend to hire and train your staff. That’s why Pop treated us kids well, since he didn’t want us quitting after seeing the bulging forehead vein of anger go off in our direction.
Theoretically, offering higher wages to employees means that they’re more likely to stay on, reducing overall costs to the company and improving the bottom line.
However, it’s not possible to predict how employers will react to a wage hike. For instance, they may decide to lay off some employees, without reducing their production expectations, which would make work more stressful for the remaining employees. This could, in turn, increase turnover (or at least have no positive effect on it).
The Bottom Line
The expected benefits of increasing the minimum wage are all based upon educated predictions and assumptions, but we can’t know for sure what a wage hike will bring. The benefits are unclear — and, as we’ll see next week, the expected drawbacks are similarly difficult to pin down.
Do you find these benefits of raising the minimum wage compelling?