Minimum Wage: The Economic Debate of the Decade

March 11, 2021

Editor(s): Anuk Kariyawasam

Introduction

The debate surrounding the ethics and efficacy of minimum wages has recently been reignited by United States (US) President Joe Biden’s proposal of a nationwide minimum wage of $15. As trade unions, small businesses, corporate lobbies, and all sides of the political spectrum begin to weigh in on the issue, what better time to answer the question economists have debated for decades? Will raising the minimum wage rapidly increase labour satisfaction, productivity, and, by extension, the economy, or will it destroy business profit margins and cause mass layoffs? The right answer is likely somewhere in the middle.

What is the minimum wage?

At its core, a minimum wage refers to a price floor on labour set by the federal government of a country (Liberto, 2021). However, this price floor is not usually a firm rate, with external factors such as location, social demographics, and level of experience leaving some room for adjustment. For example, while Australia’s minimum wage is $19.84, this rate can increase or decrease based on the age of the worker and the job type being performed (Fairwork Ombudsman, 2021). The purpose of this wage policy is to protect workers, ensuring that they are not exploited by employers paying below a living full-time wage. As a policy aimed at increasing employee satisfaction, it is first worth evaluating whether a higher minimum wage fulfills this goal.

The table above lists the top 18 countries in the 2020 World Happiness Report, which ranks countries “based by how happy their citizens perceive themselves to be” (World Happiness Report, 2020). At first glance, the table appears to promote a libertarian utopia, where a lack of minimum wages correlates to a happier populace, however, the reasoning behind this has more to do with the more involved role of trade unions in Scandinavia since the 1990s (Jorgensen, 2004). While this may not seem directly relevant to the US and greater global minimum wage debate, understanding the alternative structures put in place in the likes of Finland, Denmark, and Norway, countries with no set minimum wage, could lend valuable lessons on increasing labour welfare.

So, should we shelve the minimum wage?

While the idea of a heavily unionized America might sound far-fetched considering its generally right-leaning political tendencies, recent evidence may suggest Americans feel differently. A 2020 Gallup Poll revealed that 65% of Americans approve of Labour Unions, however, the same poll also shows that just 10% of the workforce reported being a member of a union (Brenan, 2020). In this climate, completely doing away with the minimum wage like its Scandinavian cousins have done would likely pose ethical concerns. The libertarian camp would strongly disagree with this notion, affirming that a lack of minimum wages would allow the invisible hand of the free market to adjust itself, increasing employment and total productivity. This argument does raise valuable questions about which demographic of workers are worst affected by increases to minimum wages, usually low skill, current minimum wage earners. Milton Friedman, a famous libertarian of the 20^th century, noted,

“minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills”

Milton Friedman

This is supported by a Congressional Budget Office study that Biden’s Wage Act of 2021 would reduce employment by 1.4 million workers, with lower-income workers disproportionately affected (CBO, 2021). If unemployment resulting from the raising of minimum wages disproportionately affects the lower socio-economic brackets of the US, the same demographic it is designed to protect, it raises questions about the motives for it.

Balancing Equality and Fairness

Ultimately, the minimum wage debate has become one of equality. While one alternative involves the exploitation of workers for unacceptable wages, the other involves a significant budget deficit and higher unemployment. In the end, the aggrieved party is likely lower educated, marginalized socio-economic groups. While the Democrat party is in a strong position in both the house and senate, Biden’s plan to double the current minimum wage during a pandemic with the economy struggling to recover may not be an easy pill to swallow for Independents and Republicans. Democrat Rep. Pramila Jayapal stated that this is a perfect time,

“in the midst of this pandemic, to give millions of workers a long overdue raise” .

Democrat Rep. Pramila Jayapal

While giving workers a higher disposable income during these difficult times is understandable and economically sound, ensuring that consumer spending remains stable, shifting the burden to pay these greater incomes to small businesses is an unfair, potentially damaging resolution. The Center for American Progress asserts that the increase in costs will be returned to business owners as productivity increases, pointing to evidence that higher wages increase worker output (Willingham, 2021). According to the Harvard Business Review, a key reason for these improvements is that having higher wages than competing businesses motivates employees to work harder since they simply have more to lose (Carter, 2019). A raise to a federally mandated minimum wage would not have the same effects because employees would be able to achieve the same wages at any other firm and have less incentive to work harder.

Conclusion

In conclusion, the minimum wage dilemma is anything but a clear-cut issue, with strong arguments for both sides regarding the mistreatment of both small businesses and disadvantaged workers. While theoretical arguments for the superiority of one policy over the other can be debated endlessly, two conclusions can be made about the economic climate in the US. On one hand, decisive short-term action in the wake of the pandemic is necessary, low wages will only continue to decrease consumer confidence and further worsen the US economy. However, measures like minimum wage raises, which affect small businesses must be taken with care and full bipartisan support. If Joe Biden could reduce his proposed minimum wage hikes to get complete support in the house and move quickly to implementation, it would greatly benefit the economy. Consequently, the US must acknowledge that raising the minimum wage is a short-term solution. To make real headway into ensuring income equality and higher living standards, there need to be significant long-term investments made into education and training for low skill workers as well as taking note of Scandinavian models and encouraging unionization and bargaining in different industries so that businesses and workers can come to negotiate fair pay for fair work without the excessive implementation lag that any government faces.

References

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Brenan, M. (2021). At 65%, Approval of Labor Unions in U.S. Remains High. Retrieved 7 March 2021, from https://news.gallup.com/poll/318980/approval-labor-unions-remains-high.aspx

Carter, S. (2021). The Impact of Wages on Employee Productivity. Retrieved 7 March 2021, from https://www.forbes.com/sites/forbesbooksauthors/2019/09/12/the-impact-of-wages-on-employee-productivity/?sh=6d477ba760cf

Edwards, C. (2021). Minimum Wage Effects. Retrieved 7 March 2021, from https://www.cato.org/blog/minimum-wage-effects#:~:text=Milton%20Friedman%20noted%20that%20the,people%20who%20have%20low%20skills.%E2%80%9D

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Jørgensen, H. (2021). The Role of the Trade Unions in Social Restructuring in Scandinavia in the 1990s. Revue Francaise Des Affaires Sociales, 2003/4, 151-176. Retrieved from https://www.cairn.info/revue-francaise-des-affaires-sociales-2003-4-page-151.htm

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Willingham, Z. (2021). Small Businesses Get a Boost From a $15 Minimum Wage – Center for American Progress. Retrieved 7 March 2021, from https://www.americanprogress.org/issues/economy/reports/2021/02/25/496355/small-businesses-get-boost-15-minimum-wage/#:~:text=Conclusion,of%20raising%20the%20minimum%20wage.