The Effects of a Change in the Minimum Wage
In 1938, the Fair Labor Standards Act was passed and ever since, the United States has required that all firms that do at least $500,000 worth of business per year pay their workers a minimum wage (“Handy” n.pag.). Because it affects so many workers in so many different aspects of the economy, the minimum wage plays a big part in the cost of labor and how firms deal with those costs. A change in the minimum wage, which would seemingly affect only workers, can actually be felt sometimes all the way down to the consumer, who might end up paying for it in the end—unless the firm finds another way to pay for the mandatory raise for all its workers, such as a decrease in its workforce or a change in the production process. These changes the consumer might not noticeably feel. A change in the minimum wage has several short-term and long-term effects on the economy that can be either beneficial or devastating to society at large.
The arguments for and against the minimum wage have been ongoing. On one hand, it’s simply a supply and demand issue. As prices (or wages) rise, the demand for that product (or labor) decreases—in other words, employers will simply stop or slow down their hiring. If the minimum wage increases too much, then it could even force some smaller firms out of business. Then even more people will be out of work. On the other hand, better paid employees could feel more motivation to increase their productivity. And increase in a company’s productivity could be high enough that, in order to keep up supply, it might need to hire even more employees. In this case, raising the minimum wage has increased employment.
So who’s right? Almost all studies of minimum wage effects find that it does cause some degree of unemployment, especially among 16 to 19 year olds. Estimates state that a 10% increase in the minimum wage will reduce teenage employment by 1-2%; employment for young adults (age 20-24 years) will also decrease by 1.5-2% (Neumark and Wascher n.pag.). Restaurant employment, however, felt no significant minimum wage effects, even though it is generally low-wage in nature. “A possible explanation for this outcome is the credit given to tipped employees that effectively reduces their minimum wage” (Partridge and Partridge n.pag.). So the anit-poverty effect of minimum wage is felt depending on what side you are on. If you lose your job you could fall deeper into poverty, but if you get to keep your job a rising minimum wage could help pull you out of poverty.
Going along with that, it cannot be ignored that some states nearly always set their minimum wages above the federal level, and by the late 1980s, over one quarter of the states had a minimum wage higher than the federal mandate (Neumark and Wascher n.pag.). This almost makes changing the minimum wage a political issue rather than an economic one. Mark and Jamie Partridge explain how policy makers would have to consider...