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Weighing the pros and cons of a minimum wage hike
President Franklin D. Roosevelt signed the original Fair Labor Standards Act on June 25, 1938, setting the first federal minimum wage at $0.25 an hour, according to the U.S. Department of Labor. He did so in response to a grave national crisis, the Great Depression, and a growing concern for unfair labor practices in the United States that left many workers overworked and underpaid. More than seven decades later, the minimum wage is still one of the most fiercely debated subjects on the American political landscape.
The economic environment created by the recession of the late 2000s has revealed a wide income gap that's prompted many, including President Barack Obama, to propose a significant increase in the federal minimum wage. During his 2014 State of the Union address, Obama asked Congress to help him raise the federal minimum wage to $10.10 an hour, according to the White House. Republicans in Congress have managed to block the proposal thus far, but the reason it's so heavily contested is because there are strong arguments on both sides of the debate. It's important for workers and business owners alike to understand what those are.
The DOL reported that 23 of the 50 states already have a minimum wage that's equivalent to or higher than the current federal minimum. If the federal minimum were to rise as proposed, it would increase wages for 28 million low-wage workers nationwide.
"A higher minimum wage means a raise for 28 million workers."
- According to the DOL, one of the popular misconceptions about raising the minimum wage is that it would primarily help teenagers and part-time employees who aren't necessarily relying on their low-wage income for support - in other words, they don't need it. The labor department claimed that this is not true - 88 percent of low-wage workers are more than 20-years-old and 55 percent of them are women. In addition, 53 percent of all low-wage workers are full-time employees.
- In January 2014, a letter was signed by 600 economists in support of the proposed $10.10 minimum wage by 2016, according to the Economic Policy Institute. The letter was addressed to political leaders in Washington D.C., including speaker John Boehner, Nancy Pelosi and President Obama. The argument presented in the letter states that an increase in minimum wage would result in an overall stimulation to the economy, albeit a small one. What's more, the economists said that additional workers would see an increase in their wages as a result of a "spillover effect," which occurs as employers shift the wage structure within their companies.
- The purchasing power of the $7.25 an hour minimum wage in 2012 was 30 percent lower than it was in 1968, according to a report by the National Employment Law Project. This means that since the minimum wage has not been adjusted for inflation, it needs to increase in order for low-wage workers to survive in the current economy.
- The NELP report also found that 66 percent of low-wage workers are employed by large corporations. Of the 50 largest employers of low wage workers in the U.S., 75 percent are bringing in higher revenue than they were before the recession of the late 2000s. While many have argued that a minimum wage increase would hurt businesses, NELP concluded that most low-wage employers would be more than capable of adjusting.
- The EPI published a report scrutinizing a study conducted by the Financial Policy Institute, which is often cited by supporters of the minimum wage increase. The EPI's report concluded that a minimum wage hike would actually result in a "significant decrease in retail and small business employment." While many low-wage workers would be experiencing a direct wage increase, others would suffer as a result of an "adverse labor market" created by it, according to the EPI.
- Forbes contributor Mike Patton suggested that a hypothetical minimum wage increase to $15.00 an hour would cause a knee-jerk reaction in many small businesses - owners would likely increase prices and cut jobs to make up for the bite out of their profit margins.
- The Congressional Budget Office conducted a study that tends to agree with both Patton and the EPI's assertions. The report states that while most low-wage workers would see an initial increase to their wages, many jobs would be eliminated to protect profit margins. The CBO estimates that if Obama's proposal is implemented by 2016, as many as 1 million low-wage workers may become unemployed.
While supporters expect at least a small boost to the economy if the minimum wage is increased, the CBO reported that positive effects on the economy would be offset by a number of factors - including small businesses raising their prices and costing consumers more money, and a drastic reduction in income for those who may have lost their jobs as a result of the wage increase.
"The proposed minimum wage could cut up to 1 million jobs."
- The CBO report also concluded that workers who benefit from the increase will likely end up paying more taxes and receive less benefits from the federal government. On the contrary, small businesses and those whose jobs were cut will pay less taxes and receive more benefits. The CBO projected this will lead to an increase in federal budget deficits in the long run.
It's pretty clear from both sides that the effects of a minimum wage increase will come down to the way in which businesses handle it. Individual small business owners might be willing to take the cut to their current profit margin, while others might seek to compensate with job cuts and price gouges. Whatever the case, this will likely be a hot button issue for years to come.
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