Last week, I explored three of the common benefits of raising the minimum wage. While the conventional wisdom suggests these minimum wage hikes will stimulate the economy, improve entitlement programs, and reduce turnover rates for businesses, the research has shown that those benefits aren’t nearly as clear-cut as the sound bytes might lead you to believe.
This week, we’ll examine what the research says about the most common arguments against raising the minimum wage:
A Wage Hike Increases Unemployment
One of the biggest arguments against minimum wage increases is the potential effect on national unemployment. Basic economic theory posits that businesses required to spend more on low-wage workers hire fewer of those workers in order to maintain their bottom line. In fact, the Congressional Budget Office has projected that raising the minimum wage to $10.10 would reduce total employment by approximately 500,000 workers (or 0.3%).
As Rex Huppke of the Chicago Tribune puts it: “If you look at the CBO’s estimates, it seems that a decision on raising the federal minimum wage could boil down to a moral quandary: Is it better to lift up 16.5 million people while leaving 500,000 unemployed, or would the country be better off making sure there are more jobs, even if it means lower wages?”
As a matter of fact, that moral quandary often seems to be the center of the debate on minimum wage (which you can see played out in the comments on last week’s piece.)
However, there does still seem to be more to explore within the realm of pure numbers. There are a huge number of variables that go into determining what effect minimum wage increases will have on unemployment and the economy as a whole.
It’s impossible to know if employers will respond to a wage hike by eating the loss, firing employees, reducing the wages of higher-paid employees, passing the costs on to customers, becoming more efficient, or some combination of all of these. Without a crystal ball, it’s impossible to pin down any of the variables. (And this is why economists often have worse reputations for accuracy than meteorologists).
It’s also important to note that economists themselves are sharply divided on the effect of minimum-wage increases on unemployment. A study by leading economists found no evidence that minimum wage hikes lowered employment, compared to trends in areas that didn’t see an increase in the minimum wage.
Other studies have similar findings, although many more do see a correlation between increased minimum wages and higher unemployment. But with the number of variables that go into our economy, there’s no way to know for certain.
Raising the Minimum Wage is Too Expensive
According to the CBO, the increased earnings by raising the minimum wage to $10.10 would amount to $31 billion. While we think of that as “earnings,” it’s important to remember there is a cost. Employers and small business owners will potentially be seeing their profits decrease by that amount, meaning that we could look at those earnings as a net cost to American industry.
Considering the fact that only 19% of those additional earnings (not quite $6 billion) would be going to families living in poverty, it could be argued that the overall cost is greater than the potential benefit to the poor.
As a matter of fact, economist Adam Ozimek has pointed out that increasing the Earned Income Tax Credit for large families and single people has about the same net effect on the finances of the poor — while costing about one-fifth as much as a wage hike. (The numbers from Ozimek’s study were from the 2007 wage hike, but the effect is the same in 2014). As that piece puts it, this “suggests that if you want to help families escape poverty, wage subsidies are a more cost-effective option than the minimum wage.”
The Bottom Line
There’s no clear right answer when it comes to raising the minimum wage, and intelligent and compassionate people can honestly disagree with each other on this issue. The important thing is that all sides of the issue are examined carefully before any particular plan is implemented. As a society, we should attempt to do the most good at the lowest cost — and recognize that we’ll never achieve perfection.
Which side of the debate do you fall on? Do you agree with these drawbacks of raising the minimum wage?