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Support and Criticism for a Minimum Wage Increase

Server low wage worker
The last increase in the federal minimum wage was in July 2009, raising the rate to a meager $7.25 per hour.

Over three years have passed — nothing has changed.

In President Obama’s State of the Union address in February, he suggested an incremental increase in the federal minimum wage.

The increase to $9.00 would reach the maximum amount by year 2015 and then would be indexed for inflation afterwards. Currently the idea is only a business proposal, so it will still have to pass through a highly divided Congress where it is likely to be disputed or overturned.

Since President Obama’s speech, both supporters and critics have discussed whether or not the minimum wage needs to be addressed, especially at this economically vulnerable time.

One direct oppositional force comes from the National Federation of Independent Businesses (NFIB), who states that “raising the minimum wage will have a deep and disproportionate impact on the small-business sector.”

But would a $1.75 increase really impact the national economy in a negative way, as feared?

‘The Perfect Storm’

Steven Raz, co-founder and managing partner of Cornerstone Search Group, believes an increase could be the final straw in a long list of hits against small businesses.

“It’s going to do the opposite of what is intended. I think this could be a job killer for a lot of businesses that hire at that level,” he said.

Raz said that the economic tailspin, Obamacare, and the growing national deficit are hitting businesses hard.

“Anyone pushing a minimum wage increase knows that could have a potentially negative effect,” he said. “I’m hoping it’s not going to be the perfect storm.”

Raz said an increase will inhibit job growth and he does not support the increase.

Philip Noftsinger, business unit president at CBIZ Payroll, agrees that the timing is wrong.

Noftsinger said the reason that the rate has remained stagnant for the past three years is likely due to high unemployment rates. He said raising the price of labor will decrease the demand for labor.

“That’s not something you want to do when unemployment is at its current levels,” he said to loans.org.

But two reports disagree.

The first report by the Economic Policy Institute (EPI), found that increasing the federal minimum wage would not cause job loss. In their March 2013 report, the authors suggest increasing the proposed minimum wage to $10.10.

EPI predicts a proposed increase to $10.10 per hour would generate about 140,000 new jobs.

“In fact, throughout the nation, minimum-wage increases would create jobs,” the report said. “Like unemployment insurance benefits or tax breaks for low- and middle-income workers, raising the minimum wage puts more money in the pockets of working families when they need it most, thereby augmenting their spending power.”

The second study by the Federal Reserve Bank of Chicago found that the increase could be a positive spike for consumer spending. The study found that increases in the minimum wage rate positively affects consumer spending. Each category of the study found that consumer debt, especially for new loans, increased after a minimum wage increase.

Retailers in the consumer goods, electronics, automobile, and home appliance sectors could see a sizable increase in business if the proposal is passed.

Wage vs. Productivity

According to a 2012 study by the Center for Economic and Policy Research (CEPR), productivity growth has far outpaced the minimum wage since 1968. The report found that if the minimum wage continued at the rate of average productivity after 1968, the current minimum wage would have reached $21.72 per hour by 2012.

Even if the federal minimum wage was set at one-fourth the rate of productivity, it would still be $12.25.

Noftsinger does not believe a minimum wage increase will have a “material impact” on the economy due to the small amount of minimum wage workers.

But minimum wage workers, as a group, are a large portion of the economy.

According to the Bureau of Labor Statistics, 3.6 million workers received wages at or below the federal minimum level, totaling 4.7 percent of all hourly paid workers.

In the EPI’s report and proposed minimum wage increase to $10.10, millions of workers would be impacted. Within the first year, after a proposed increase from $7.25 to $8.20, 14 million workers, direct and indirect, would receive higher wages. The second proposed incremental increase, to $9.15 in 2014, would impact 21 million workers. The final proposed increase to $10.10 in 2015 would impact 30 million workers.  

Currently, 19 states have minimum wages that are higher than the federal level. Some states have minimum wage rates lower than the federal rate, or they lack one entirely, but legally they must offer the federal rate.

Market Demands

Some critics of the increase say the economy should focus more on market set wages, rather than a national minimum.

Noftsinger said that potential price increases to the cost structure are always open discussion topics among business owners. But just because owners are ready for new ideas to appear, it does not mean they are willing to embrace them.

“When asked, philosophically, most business owners would state that one way to help reach greater employment is to remove the minimum wage and let the market demand set wages,” Noftsinger said.

He said that basic economic theory states that if the government removed the minimum wage, it is possible that more workers would be employed. The trade off — workers would be paid less.

But Noftsinger said the increase in employment would generate more consumer demand and, over time, market opportunities for wages would fluctuate and rise based upon market demand.

“By setting a false floor, you create unemployment as businesses are unwilling to consume labor at the higher price, demanding more productivity from each worker at the higher wage level,” he said.

Raz agrees that employer expectations will rise with the minimum wage.

“The more money you are paying someone, the higher your expectations,” he said.

Although Raz believes that the minimum wage should remain as a safety net for those at the lower end of the workforce, it should not increase. Instead, he believes ideals of free market capitalism should be used where a worker’s time is based on their specific skillset.

“I believe the free market adjusts and pays people fairly,” Raz said.

Misconceptions Run Deep

One fear resounding after Obama’s speech is that of job elimination. If businesses are forced to pay their minimum wage workers more, then they will have less funding and be forced to employ less workers for fewer hours.

Rohit Arora, CEO of Biz2Credit, said retail companies with large forces of minimum wage workers will likely have to reduce employee’s hours to less than 30 hours per week to balance out the increase.

Arora told loans.org that the potential increase will hurt employees in the long run due to a loss of jobs.

“Increasing the minimum wage makes some politicians feel good, but if they really want to help people, the government should support measures to retrain workers and give them marketable skills in the twentieth century economy,” he said.

Arora said that a low federal minimum wage is not a large societal problem, but rather the number of unskilled workers in the economy.

“Most minimum wage workers are not very highly skilled,” he said. “Jobs are being automated. Amazon is replacing workers with robots. Meanwhile, America has a shortage of skilled workers in fields such as math, science, information technology, and medicine.”

Arora agrees with President Obama that minimum wage is not enough for a living wage, but he said the government focus should shift away from “giving the least skilled workers more money” and instead “retrain them so that they can get better, higher paying jobs.”

But some sources hint that misconceptions about minimum wage positions run deep.

The EPI report states that minimum-wage workers are older, more educated, and have more family responsibilities than portrayed. For the proposed minimum wage increase, 88.3 percent of affected workers are at least 20 years old, debunking the idea that all minimum wage employees are teenage workers.

“Increasing the minimum wage to $10.10 would benefit millions of workers whose characteristics — in terms of their gender, age, race and ethnicity, educational attainment, work hours, family income and family composition — contradict some prevailing beliefs about minimum-wage workers,” the report said.

The Bottom Line

Raz said any additional cost for payroll is going to eventually cost the consumer more.

“The money has to come from somewhere,” he said.

Raz said he has discussed this matter in discussion groups and business meetings and he has not found one business owner in his circle that supports the increase.

But they are preparing for it, nonetheless.

Arora agrees that the increase will further strain businesses that are already struggling from payroll taxes and Obamacare.

“This hurts the bottom line of many companies. Some of them will run into cash flow issues. Others may have to delay expansion plans,” Arora said. “Politicians mean well, but they just aren’t business people who understand what small business owners go through on a daily basis.”