How would an increase in minimum wage affect the economy?
For the past couple of years now, the debate over minimum wage has become one of the most prominent issues in the United States. Economists, business owners, and citizens all have their own ideas pertaining to the ideal minimum wage. They all also have different perspectives of what significantly raising the minimum wage would do to the United State’s economy. By more than doubling the minimum wage to $15 per hour, the United State’s economy would suffer as worker’s hours would be shortened, prices of other goods and services would rise in response, and small businesses would have a hard time surviving.
In addition to employees being scheduled to work less hours, raising the minimum wage to $15 would also cause the prices of other goods and services to raise in response. If you increase the amount of money people are earning, business have to spend more on their labor costs, which also makes those businesses sell their goods and services at a higher price (“How”). With the cost of goods and services increasing in response to the hike in minimum wage, people wouldn’t end up being better off but rather they’d end up living the same way they were before the increase in wages. People would be making a higher amount of money, but at the same time would be spending more to buy the things that are necessities for survival. This point is important to note because higher wages wouldn’t necessarily harm nor help the economy from this perspective.
Lastly, raising wages would make it very hard for small businesses to stay a float. Small businesses rely on their local customer base which often times just barely lets them break even on their costs. With an increase in wages to $15 per hour, 37% of small retailers expressed they would see serious threats to their ability to continue operating (“How”). In addition, 40% of small business owners in the United States said they do not support an increase in wages whatsoever (Scott). Based off of that data, raising the minimum wage would cause many small businesses to shut down because they aren’t making enough profit to pay their staff and cover all of their other explicit costs. At this point, most small businesses would see that their economic profit, which includes their explicit and implicit costs, would not break even or be positive. This means that the small businesses would be better off doing something else rather than continuing to operate their businesses. In turn, having less businesses in the market would create less choice for consumers, ultimately driving prices up as there is less competition. This would be a negative effect on the economy due to the limited consumer choice causing less people to buy goods and services.
In the end, raising the minimum wage to $15 an hour would be a burden on the United State’s economy. Employee’s hours would decrease, prices of all other goods and services would rise in response, and small business would not be able to stay in business as a result of the hike in wages. Ultimately, people would be making less money, have less purchasing power, and less consumer choice if the new wage were to become a reality across the U.S.; all of which do not sound like characteristics of a world superpower’s economy.
Works Cited
“How Does the Minimum Wage Impact the Economy?” Chief Learning Officer - CLO Media, 24 July 2018, www.clomedia.com/2017/06/14/minimum-wage-impact-economy/.Ingraham, Christopher. “What Does a $15 Minimum Wage Do to the Economy? Economists Are Starting to Find out.” The Washington Post, WP Company, 11 Jan. 2018, www.washingtonpost.com/news/wonk/wp/2018/01/11/what-does-a-15-minimum-wage-do-to-the-economy-economists-are-starting-to-find-out/?noredirect=on&utm_term=.b74b1342d1ac.
Scott, Robert C. “Raising the Minimum Wage: Good for Workers, Businesses, and the Economy.” Democrats Ed-Workforce, 2018, democrats-edworkforce.house.gov/imo/media/doc/FactSheet-RaisingTheMinimumWageIsGoodForWorkers,Businesses,andTheEconomy-FINAL.pdf.
I really like your post because a lot of people think that it is easy to just raise minimum wage without realizing that this will affect the prices of other goods and in the end not be as beneficial as it initially sounds. I didn't think about the affect a higher minimum wage would have on small businesses being unable to pay their employees. Having to pay employees $15 an hour would only add to the huge initial startup cost of a business. Many people getting paid minimum wage also have the opportunity to make tips from customers to help employees make extra money without putting strain on businesses or the economy.
ReplyDeleteIt's crazy because just thinking about it you would think that raising the minimum wage would be a good thing. But once you actually dig into it you'll see that raising it will actually cause a huge burden on the U.S. economy. With the sheer fact that small businesses would may have to shut down after this raise in wages. Also, it's crazy that the prices would drastically increase for goods and services. Which means it's not worth actually raising it that much. I just found this post super interesting because I've never really thought of all the impacts of raising wages.
ReplyDeleteI like that you explained throughout your piece that simply raising the minimum wage would have even larger impacts on other areas. For example, if the minimum wage for workers is at the proposed $15 then, businesses would have their costs increase exponentially simply due to the fact that workers want an increased wage that is twice as much as their current pay. Also, I also like how you implemented in that small businesses wouldn't be able to compete with the big name brands because they wouldn't be able to afford that many workers.
ReplyDeleteI do agree with this. This piece is very good and well explained. The increase in wages would be less consequential than the decrease in work hours and therefore earning less money. If companies have to pay multiple more workers more per hour, they will consequently supply less and sell less because more of their budgets will be spent on paying employees, therefore not being able to pay as much to their total cost to produce.
ReplyDeleteI reviewed the articles you presented as evidence and I'm not sure how you drew some of the conclusions you did.
ReplyDeleteIn your second paragraph when you quoted Mr. Ingraham's article, it appears he was referring to a study done in Seattle by economists from the University of Washington and immediately after the section you quoted, Mr. Ingraham stated that Wonkblog (Washington Post) noted that the papers conclusions "contradict years of research on minimum wage," further noting that the researchers themselves emphasized this was a "work in progress." The same article also summarized a paper done by U.C. Berkeley also done in Seattle as well as in Chicago, Las Angeles, Oakland, San Francisco, San Jose and Washington, stating: "We find significantly positive effects on wages and small effects on employment, consistent with many previous studies." The article itself emphasized that "Overall, the papers presented a mixed picture on the effects of minimum wage," and many of the researchers noted that they were "works in progress."
"How" cited Alan B. Krueger, a professor of economics and public affairs at Princeton University, who noted that "If the minimum wage is set at a moderate level it does not necessarily reduce employment," further explaining that some employers did cut jobs in response to minimum wage rises but other employers found that the higher wage allowed them to fill vacancies and reduce turnover, increasing employment, despite eating into their profits. This seems to contradict the conclusions you make that employment mainly suffers from a minimum wage increase and businesses see a net negative effect.
A firm is runs on a relationship between Total Revenue and Total Cost. Profit is a a relation between these two (Profit = TR - TC). When you say "...raising the minimum wage would cause many small businesses to shut down because they aren’t making enough profit to pay their staff and cover all of their other explicit costs," I kind of have to disagree. TC is the layout of costs a firm has to cover, including staff. Profit is what is left over after these costs are paid. More of a semantics issue, but I would like to say A business with $0 accounting profit isn't going to shut down because the business isn't crashing, it's just stagnating (Though I imagine very few business make a profit of exactly $0). An increase in minimum wage does not decrease TR, only raises TC, which does lead to a decrease in profit as you point out. Profit is mainly used to potentially expand a business, invest, or give employees or owners a bonus. I will concede that a cut to these profits would limit a businesses ability to do these things which could have a detrimental effect on the economy. But this has no impact on firms that already pay their employees at or above the new minimum wage, and for industries in which minimum wage increase does have an impact the total purchasing power does not go away it is simply spread across more hands (the workers). Now I go the "How" article again, specifically the finishing paragraph, where the author summarizes arguments made by David Cooper, senior economic analyst and deputy director at Economic Analysis and Research Network at the Economic Policy Institute. To quote the article, "With fatter paychecks, workers have increased purchasing power, thus benefiting businesses... with a federal minimum wage increase, it impacts more than just a single business; all other organizations with similar employee makeups will face similar changes to their payrolls..." With a higher minimum wage a firm may have a higher TC, though an increase in the number of workers who can potentially spend money at the firm (and do it more often) especially when all firms are increasing their wages thus "producing" workers with a higher purchasing power, TR increases with the end result of negligible effect on profit or even a slight positive increase.
DeleteTo continue, you do point out an important point that "37% of small retailers expressed they would see serious threats to their ability to continue operating (“How”). In addition, 40% of small business owners in the United States said they do not support an increase in wages whatsoever (Scott)." I again go to "How" and David Cooper "If leaders think more holistically about how raising minimum wage would affect the labor market and economy as a whole, they're likely to be more supportive of a minimum wage increase."
Anyway, interesting read, sorry about the essay of a comment, and hope you have a good weekend.
Although the consequences of raising minimum wage are bad, we do need to raise it eventually. Imagine if we kept at the original minimum wage of 50 cents an hour forever. It has been nearly 7 years since minimum wage was increased. The U.S. needs a new minimum wage, or our current minimum wage will soon no longer be able to support the people who are earning it and even more of our population will slip into poverty.
ReplyDeleteYour post provides interesting insight to the side of the matter most people don't consider. It's easy for people to understand how raising the minimum wage would be beneficial by, for example, reducing government welfare spending, decreasing poverty rates, and keeping up with inflation. However, most people don't think about the negative aspects, especially the workers who are demanding a raise in pay. Your blog post effectively exposes how our economy would be, in turn, negatively effected from an increase in minimum wage. For example, it would raise the prices of both normal and inferior goods, while also making it harder for small businesses to stay in operation because their explicit costs are much higher. It's really hard for me to take a stance, especially because I'm not working to support myself and I have parents who do that for me. But I think, as you get older and rely on an income, depending on your job, you are going to lean strongly one way.
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