By: Rohan Bhagat
The 2020 Presidential Election saw the Democratic Party, long heralded as the champion of the worker, adopt much of the platform of its ever-growing progressive wing. The fight to raise the federal minimum wage has been in the public sphere since it was last raised in 2009, but never has it been as prominent, nor as contentious, as it is today. And although the idea of a $15 federal minimum wage has been largely ignored as a radical idea that would never get through Congress, the election of Joe Biden makes its possibility a reality. Candidates throughout the Democratic Party including those generally seen as moderates: Pete Buttigieg, Amy Klobuchar, and the next President, Joe Biden endorsed the policy. Despite the fact that less than 2.5% of hourly-wage workers make minimum wage, raising it could have devastating effects on the economy and the lives of the working class, and the recent surge in popularity for its increase is concerning.
Economic Impacts of Raising the Federal Minimum Wage
On the surface, higher minimum wages seem to only help low-income workers, ensuring that they can bring home enough to pay the bills and support a family. But a deeper dive into the issue suggests otherwise. To pay workers $15 an hour, business owners will have to cut costs somewhere. Most of these cuts will be to the payrolls themselves. A $15 minimum wage can only help those have a job, and with a minimum wage increase, many will lose theirs. The Congressional Budget Office predicts that up to 3.7 million jobs would be lost under a $15 federal minimum wage. Some will be replaced by automation. Most will not. This means that employers will have to choose between permanently cutting the jobs of their employees or cutting their economic productivity and operating with fewer employees.
Those that keep their jobs will not escape unscathed either. They will likely see their hours or benefits slashed, undermining the goal of higher wages. Senator Bernie Sanders, one of the strongest advocates for raising the minimum wage, experienced this very problem in his 2020 Presidential Campaign. After raising the wages of low-level staffers, the Sanders Campaign cut hours, leaving those employees taking home roughly the same amount they had before. Meanwhile, businesses that have neither the funding nor the flexibility of the Sanders Campaign, those that cannot afford to lay off employees or cut production, will be forced to simply absorb the costs. Absorption will disproportionately affect small businesses, many of which operate under thin margins and will fail if the minimum wage is increased, taking the jobs of their employees in the process.
It is clear that raising the minimum wage will be devastating to small businesses and overall economic productivity. And that is not to mention the broader impacts of the policy, which include the acceleration of inflation and rising costs of consumer goods. By contrast, a lowered minimum wage would create a number of new, lower-paying jobs that would be easily filled by those who are not involved in the job market today. Under current minimum wage laws, employers are already hesitant to hire teenagers, and would be even more reluctant if they had to pay these employees $15 an hour. Lowered minimum wages would increase the accessibility of certain jobs, increasing employment among young people who may not be actively seeking employment, or lower-skilled workers who cannot find consistent work today.
Economists have developed several, often contradictory models, to predict what effects increasing the minimum wage would have on the economy. As evidenced earlier, many of these models argue that doing so would accelerate inflation, retrench economic productivity, slash worker hours, and hurt small businesses owners just as much as the men and women they employ. And although these models can give us a sense of the economic climate created by policy changes, there is nothing that is as accurate a predictor of the effects of a policy in one country as the effects of the same policy in another.
Countries that have Eliminated the Federal Minimum Wage
Real-world examples we can look to suggest that allowing local governments to decide their own wage laws and labor unions to negotiate their own pay, may be better for the economy as a whole than having the federal government impose a one-size-fits-all policy over the whole nation.
A number of European countries have no federally mandated minimum wage, including Sweden, Denmark, Norway, Iceland, Switzerland, Finland, and Cyprus, all of whom have net average monthly salaries approximately 1.5x or greater than the European median, when adjusted for the cost of living in PPP. Through the use of industry wage standards and local minimum wage levels, these countries have made the minimum wage more efficient, by accounting for the differences in the lives of individual workers and creating wage laws that reflect them.
The Inefficiency of a Federal Minimum Wage
At its core, the national minimum wage is an issue of federalism, not economics. Regardless of whether adjusting the minimum wage can help one specific city or state, there is no one wage that can help the whole country. Life in Tchula, Mississippi, where the median household income is $13,958 is very different from life in Manhattan where the median household income is over $85,000. There are vast disparities in the costs of housing, consumer goods, and living in general across the country, so setting one wage for the whole country is not only foolish but reckless. The federal minimum wage is wasteful and inefficient and would be greatly improved by simply allowing individual states and municipalities to enact minimum wages that are appropriate for their own districts and conform to the needs of their own residents.
Final Thoughts
The federal minimum wage was designed to protect workers from businesses in an unstable and unpredictable post-depression economy, but today it disenfranchises new and low wageworkers from obtaining jobs, threatens the survival of small business, and cuts into economic production.
If we are to protect the lower class, we cannot allow the federal government to determine that hard-working Americans cannot hold a job unless they can find an employer willing to pay them $15 an hour. We cannot allow the government to price low-skilled workers out of the labor market. And we cannot allow the federal minimum wage to continue to survive.