It is true that the minimum wage in the United States is less than fair. Workers must be able to afford adequate housing without incurring a long-term debt. Joe Biden, the current democratic presidential candidate, plans to increase the minimum wage from $7.25/hr to $15/hr. This article is in response to arguments for a $15 minimum wage.
Economic Impact
Suddenly doubling the minimum wage seems great for workers, however this increase simply regresses the economy. With the COVID-19 crisis, there has already been a huge shut-down of many small businesses not being able to make ends meet. Prices of common goods will increase with the incurred costs on businesses. Inflation will counter-act the good that this dramatic increase will cause, housing prices will increase worsening the affordability of housing for all economic classes.
The increase in minimum wage will disproportionately affect small businesses negatively, which have already been damaged by the COVID-19 crisis. The incurred costs on these businesses have to go somewhere, it will translate back to the end product being at a higher price (which does not increase linearly with the disposable income of workers) or sourcing lower quality material for the product. And of course, lower quality material will probably be sourced from other countries, separating the business from the American economy even further. Keeping in mind that even larger companies will not want to base their businesses in the United States in the future. There is far cheaper labor and low-skilled work in other countries which will only separate American businesses from the American economy, reducing contributions and circulation. You may think that this is already happening, and yes, it is. However the difference in wages may have not been enough to justify the “move”, but since the minimum wage is doubling, there is a lot more incentive to move to another country. If I was a business man, I know that I would go ahead and base my business in a much cheaper country.
Response to David Pakman’s (2017) “Analysis: $15 Minimum Wage”
“Businesses will obtain more customers as consumers have more money to spend” ~David Pakman
Firstly, the increase in minimum wage is aimed at covering the cost of living and other needs to get people out of poverty. Due to the simple nature of why minimum wage is increasing, there is no possible way that the increase will linearly translate into more customers for businesses. Besides, this cannot be expected for most industries, and is not a good enough justification.
“It only impacts the portion of workers in a business that earn minimum wage” ~David Pakman
This is simply not true, as the increase in minimum wage is all the way to $15/hr, it impacts all employees in a business that earn less than $15/hr. And reporting of the number of people earning minimum wage is sketchy at best. As if i was earning $7.5/hr, that is above minimum wage, but not enough to be able to afford good housing and not fall into poverty. Therefore, companies can easily report that the percentage of employees earning minimum wage is very low. However, we do not actually know how many are earning only slightly above minimum wage, or way above it.
Keeping in mind, for corporate incentive for employees to work hard and achieve higher managerial positions, the pay has to increase reasonably with the incurred responsibilities on the employee. Therefore, if a managerial employee earns $17/hr, and a waitress earns $15/hr, with far less responsibilities, that breaks the structure and incentive for employees of a business. Requiring the business to increase pay for employees with more responsibilities. You can see how this spirals into even more inflation.
The examples that David Pakman provide for incurred costs on companies paying a minimum wage of $15/hr only seems to be on corporations like Papa Johns and McDonald's. And no analysis on small businesses. Pakman is focusing on affecting only one portion of businesses while we seem to forget that nearly 120 million people (49.2%) of the American workforce are employed by small businesses.
“[Paraphrased] Profits that are usually distributed to executives by bonuses, salary increase, or shareholders will be redistributed to the workers” ~David Pakman
I definitely agree that profits are given to shareholders and executives who would rather keep the money than use it and circulate it in the economy, which is far worse than providing it to workers who will use the money and circulate it through the economy. However, for some reason there is this expectation that after increasing the minimum wage, executives will gladly redistribute their profits to employees? I do not see how there is any way to get to that conclusion simply from increasing minimum wage, or even increasing profits in general, disregarding minimum wage.
Conclusion
Increasing the minimum wage to $15/hr will mostly negatively affect the economy, and disproportionately affect smaller businesses without much gain after adjustment for inflation. There is definitely a need for higher wages in the United States and workers have a right to a fair wage, however a dramatic increase to $15/hr is too far gone and the arguments for it are weak.
In Joe Biden’s case, I still disagree that there should be a $15/hr minimum wage. However, I believe the candidate is overshooting to find a more reasonable compromise possible reaching around $9–$10/hr which is a far more reasonable increase to adjust for inflation and productivity.
