Rohan Gulati ’13, Daniel Saedi ’13:
Obama’s proposed raise of the minimum wage protects workers during economic downturns, allows families to live above the poverty line, and benefits the economy through increased spending and borrowing.
President Obama recently introduced the idea of gradually raising the minimum wage in his State of the Union address. His plan called for either a gradual increase to $9/hour, or a cost of living adjustment that would be applied at the discretion of Congress. Though the federal minimum wage was raised in 2007, when they is adjusted for inflation, nominal wages are actually at their lowest point since the 1960’s.
A family of four with two minimum wage earning workers only grosses $29,000 per year, which after taxes would place them below the poverty line. This is unacceptable by American standards, considering 50 years ago only one minimum wage earner could sustain an entire family above the poverty line. From a moral standpoint, there should be a consensus that the minimum wage should at least be enough to avoid poverty. Even former governor Mitt Romney concurred with the President when he said he would like to see a cost of living adjustment (COLA) for minimum wage. Furthermore, income inequality is much more pronounced in America than it is in other industrialized nations. Raising the minimum wage would have few adverse effects while simultaneously reducing the rich-poor divide.
The driving ideology behind a minimum wage is that it protects workers in times of reduced competition. In a healthy business environment where worker productivity increases at a nominal pace, the market competition itself would in turn create higher wages. However, in the back end of a business cycle or in times, like now, where low-skill jobs have not seen much growth in productivity, the labor market would enter a period of deflationary wages. If there were no minimum wage, there would be a sizeable drop in wages for low-skill workers that would severely depress the economy even further. Therefore a sensible minimum wage also offers protection for the market as well, preventing a rapid decline in consumption.
Opponents of a raise in minimum wage state that it would force smaller business to layoff workers, which would have the effect of increasing unemployment. Though in theory this is a valid argument, economists have not reached a consensus on its effects on employment. A recent empirical study conducted by economists at Berkeley, however, concluded that when states increased their minimum wage, there was no significant growth in unemployment. When workers are paid more, their tends to be less turnover, which not only reduces costs but also increases worker productivity. The Boothe School of Business at the University of Chicago recently conducted a panel survey of respected economists about a raise in minimum wage. Though there was no consensus on the effects on employment, a significant majority of economists agreed that a gradual or consumer price index pegged increase to minimum wage would have more benefits than negative effects on the economy.
The increase in income for low-income workers would help stimulate the economy through greater spending and borrowing. Low-income individuals have a lower savings rate that high-income individuals because they spend a larger percentage of their income. As such, low-income workers have a higher economic multiplier; for every dollar they earn, they put a larger percentage back into the economy. A study by the Federal Reserve Bank of Chicago showed that workers have an extra $700 in economic activity for every quarter that minimum wage is increased. The study modeled that an increase in wages would not only generate more consumption, but also more borrowing, which would provide needed short term stimulus. This increase in economic activity and consumption will certainly outweigh any direct potential loss in employment. Therefore, instead of stifling employment and the economy in general, raising the minimum wage will only stimulate growth and help families during times of economic strife.