A minimum wage became part of the U.S. society in 1938 when the Fair Labor Standards Act established a rate of $0.25 per hour for workers. Although there were several exemptions to the initial rule, it would become the foundation for future economic policies for the next generations of Americans.
President Franklin D. Roosevelt was the primary force behind the idea of a minimum wage in the United States. He fought both political parties, corporations, and the Supreme Court to have the concept included in the 1938 legislation.
The night before the minimum wage was instituted, FDR has this to say during a fireside chat about the subject.
“Do not let any calamity-howling executive with an income of $1,000 a day, who has been turning his employees over to the government relief rolls in order to preserve his company’s undistributed reserves, tell you – using his stockholders’ money to pay the postage for his personal opinions – tell you that a wage of $11 a week is going to have a disastrous effect on all American industry.”
For over 80 years, the world has been debating the minimum wage pros and cons. Here are the crucial points that each side brings up as part of the discussion.
List of the Pros of the Minimum Wage
1. A minimum wage allows workers to get beyond survival.
Workers become more productive when they have fewer worries and stressors happening in their personal life. If you’re unsure of how to pay the rent, buy groceries, or purchase the fuel needed to get to work, then the focus is on these issues instead of the assignments you must complete. People are more creative when they get enough food to eat and can sleep in a secure location. A minimum wage can make this possible because it guarantees a specific wage that people can then use to make their own budget.
2. A minimum wage promotes equality throughout society.
The general rule of economics is that people who are in power will typically do whatever they can to retain it. When you live in a partial free-market society, then money becomes one of the primary motivators for success. That’s why trickle-down economic policies fail to take hold, even though the theory itself is sound. Those who receive the economic benefits usually fail to make them available to everyone else.
Offering a minimum wage creates an incentive to work because it provides wages that are higher than what the social welfare system offers. When there is more income available, then there are more opportunities to upgrade housing, purchase better groceries, and make a life for oneself.
3. A minimum wage can encourage more economic growth.
One of the significant advantages of having a minimum wage in society is that it can provide robust levels of economic growth. Free-market systems thrive when households have more discretionary money to spend. Even purchases that are only for basic needs, such as food, clothing, and shelter, still promote higher levels of strength. About 43% of the money someone spends with providers outside of their community gets reinvested back into it, while 68% gets reinvested when someone works with a local business. That means for every extra $1 someone earns per week, another $0.43 of influences at minimum helps the economy too.
4. A minimum wage can create an incentive to work.
When there is a minimum wage in place, then the skill positions that employers require receive a bump in their salary offers as well. It creates an incentive to work instead of being on a welfare program. This structure also creates the desire to pursue more education or experience because it can lead to a higher wage in the future. Although this process can impact some workers negatively if they’ve worked for several years and then receive the same pay that a new employee receives, the general benefits of this advantage typically outweigh the risks involved.
5. A minimum wage promotes stability in the general workforce.
When there isn’t a minimum wage in place, then workers will continue moving to different positions as a way to improve their paycheck. That usually means that they’ll take a similar job with a different employer. When businesses consider the cost of recruitment and training with their labor costs, it is more advantageous to have a stable workforce than it is to be frugal with worker salaries. Having a specific level of compensation available won’t eliminate turnover completely, but it will offer more stability that can reduce costs enough to wash out the budget costs of more expensive labor.
6. A minimum wage makes it possible for workers to start saving.
The current personal savings rate in the United States is only 2.4%. Many households are living paycheck to paycheck even with a minimum wage in place because of market inflation in numerous sectors. 56% of parents right now are not saving anything for their retirement. 18% of Americans have less than $1,000 in the bank right now. When there is a higher minimum wage available for workers, then they can begin saving for an emergency situation. At the moment, nearly half of all households can’t afford a single problem. A shift in minimum wage policies could change this.
7. A minimum wage impacts a small minority of workers in the developed world.
The number of workers who earned the minimum wage in 2016 for their full-time employment was under 3%. About 30 years ago, that figure was roughly 13%. There are about 1.5 million employees who do not qualify for the protections of this salary, but it does show that most workers are able to move beyond the $7.25 minimum already. Boosting the wage of those who have been unable to do so, especially if they are working full-time jobs, can help them earn enough to be self-supporting.
8. A minimum wage makes an immediate impact on the economy.
Even if there are some eventual disadvantages which occur with a minimum wage, they are typically long-term issues to consider that additional economic adjustments can manage. When you start paying someone a higher wage, then they immediately benefit from the experience. The costs of rent, food, and the basic essentials of life do not immediately rise on their first paycheck. That means workers get the chance to save some cash, pay off a little debt, or purchase items they’ve been needing and unable to afford in the past.
9. A minimum wage creates a stronger tax base.
When workers are making more money, then they are paying more in taxes over a wide spectrum. Although federal taxes in the U.S. may not require a significant obligation to create a positive change, local and state governments may see an improvement in sales tax revenues. The additional spending that can happen with a higher minimum wage can offset some of the expenses of higher salaries as well, making it possible for firms, infrastructure, and social programs to offer more effective supports.
List of the Cons of the Minimum Wage
1. A minimum wage always has some exemptions to it.
There are several exceptions to the minimum wage laws in the United States which make it possible for employers to avoid paying the $7.25 per hour that the law requires. Youth workers can receive $4.25 per hour if they are under the age of 20 during their first 90 consecutive calendar days when working. Then they receive a bump up to the minimum wage after that time. Some programs allow workers with disabilities, workstudy employees, and full-time students to receive less than the minimum as well.
Tipped employees receive $2.13 per hour in direct wages at minimum if that amount and their tips equals the required $7.25 per hour. The employee must retain all tips and receive at least $30 per month to qualify for this. If not, then the employer must equal the $7.25 per hour minimum in the United States.
2. A minimum wage increases the labor costs for each business.
If you raise the cost of labor for a business, then it becomes more expensive to offer goods or services to the market. Some companies have 40% of their expenses go to employee wages. If the law requires that a higher minimum wage be given to workers, then this expense is either passed along to the consumer or the company absorbs it. The former makes purchases more expensive, while the latter reduces the amount of innovation and creativity which are available in society.
3. A minimum wage impacts low-wage workers negatively.
When there is a mandate to implement or raise a minimum wage, then the workers on the lowest end of the income spectrum receive the most severe adverse impacts to the move. If items cost more to purchase, then they are still unable to make ends meet. Higher wage workers can balance out the costs with higher levels of productivity to avoid this disadvantage. Employers will even look at automation or position consolidation as a way to save money, which means that unemployment levels can begin to rise if the minimum wage goes up high enough.
4. A minimum wage does not always have a positive influence on poverty.
The reason why a minimum wage is desirable for many is that it offers a chance to reduce poverty at the local level. When workers have access to employment opportunities and subsidized housing that can minimize their debt expenses, then this is possible. Most workers will not have access to one or the other (if not both), which can result in higher rates of unemployment or underemployment. When this disadvantage combines with a stagnant economy, it is possible for some communities to see their poverty rates increase.
5. A minimum wage shifts the economic foundation of communities.
A minimum wage works to reward the businesses which are following pursuits that require intensive amounts of capital. If a firm offers goods or services in a manner that is labor-intensive, then they bear the largest burden under this payment structure. Workers will still eventually see compensation levels stabilize for the job opportunities which are available, but it can reduce the number of low-skill, general labor positions that are available because it costs more to hire for that position.
6. A minimum wage promotes freelancing, outsourcing, and offshoring.
Freelancers in the United States (and throughout the world) can set whatever rates they want for themselves. That means they can produce work that falls beneath the minimum wage threshold in their position. This structure makes it advantageous for companies to hire outside of the traditional employment process because it is cheaper for them. That’s why there is an emphasis on outsourcing and offshoring as well. It is a lot cheaper to pay someone $0.09 per hour in Bangladesh than it is to pay $7.25 per hour in the United States.
7. A minimum wage could place some small businesses into bankruptcy.
The cost of a minimum wage can be enough to place some small businesses into bankruptcy proceedings. It is not unusual for some companies to shut down because they can no longer afford the cost of labor. The industries which have the thinnest operating margins tend to experience the most significant effects of this policy. The beverage manufacturing industry had a 0.8% profit margin in 2016. Grocery wholesalers had a 1.9% margin. Forbes notes that 15 key industries in the U.S., from automobile dealers to home furnishing stores, are significantly below the 7.7% average margin. These are the businesses most at risk for harm when there is a change to the minimum wage.
8. A minimum wage does not account for the additional benefits workers receive.
MIT studied what the actual cost of an employee is for businesses in the United States, taking into account the employer share of Social Security and Medicare costs, benefits, workers’ compensation policies, utility costs, and additional expenses. Someone earning the minimum wage might earn another $5,000 to $10,000 in non-cash earnings through their benefits. The laws governing how much to compensate workers do not always take these factors into account.
The pros and cons of a minimum wage suggest that it may improve employment opportunities that are available locally, regionally, and nationally depending on how the policies are implemented. Although it creates a higher labor cost, it also produces more creativity within the workforce that can lead to greater profits. If the wage is set too high, then the economy may experience inflation as a way to cope with the issue. Finding the correct balance between a living wage and an unreasonable one is not always easy, but it is usually an effort worth making to create equal chances for success in society.
Natalie Regoli, Esq. is the author of this post and the editor-in-chief of our blog. She received her B.A. in Economics from the University of Washington and her Masters in Law from The University of Texas School of Law. In addition to being a seasoned writer, Natalie has almost two decades of experience as a lawyer and banker. If you would like to reach out to contact Natalie, then go here to send her a message.