Should We Raise the Minimum Wage?

Raising the minimum wage has been a key initiative for the Obama administration. Obama wants to raise the national minimum wage from $7.25 to $10.10 per hour. Putting his words into action, he even signed an executive order to pay new hires working on federal service contracts a minimum wage of $10.10/hour.

Obama isn’t the only one seeking to pay his workers more. Currently, 29 states and D.C. have minimum wages above the federal minimum wage of $7.25. To see how raising the minimum wage affected job creation, economists at Goldman Sachs (GS) conducted an evaluation of the 13 states that enacted the change in 2014. GS compared the employment change between December and January in those 13 states to the states that didn’t raise minimum wage, and found that that the states with minimum-wage increases had faster employment growth than the states where the minimum wage remained at its 2013 level.

Even some cities are raising their minimum wage. For example, Seattle passed a new $15/hour minimum wage that will begin going into effect starting April 2015. This will be the highest minimum wage in the U.S.

Yet despite an executive order and positive results for some cities and states, many people still disagree with raising the minimum wage. Why should we raise the minimum wage? Why shouldn’t we? These are both good questions. Let’s take a look.

Why Businesses Owners Favor Raising the Minimum Wage

T.J. Maxx, Marshalls, HomeGoods, Walmart, The Gap, IKEA, and Aetna all raised their minimum wages in the last few years. There’s no law in place saying they have to, and no protestors boycott their stores in an attempt to bully them into it. No, these stores made the decision on their own.

But why would a business choose to pay its workers more? There are a lot of reasons, according to Chris Sommers, co-founder of Pi Pizzerias and Gringo Mexican restaurant. Sommers recently raised his workers’ minimum wages to $10.10/hour and wrote an opinion piece that ended up on the Department of Labor’s blog. Sommers argues that one big reason is that business can help create more jobs.

"Business owners don’t create more jobs when they have more money in their own pockets," he writes. "We create more jobs when other people have more money in their pockets to spend at our businesses.”

Okay, that argument has been made before. But Sommers continues, calling out three key benefits that balance increased payroll costs.

Reduced employee turnover rates

Employees who can make ends meet stay longer, are less stressed, and are more productive. High employee turnover costs businesses time and money in recruiting and training new workers.

The example Sommers gave: “We spend more than $500 training a new line cook. We threw away thousands of dollars in product a year due to inexperienced employees preparing it improperly. Eliminating just a portion of these expenses pays for increased minimum wages.”

Increased productivity

The higher wages gave Sommers’ employees a morale boost and increased their loyalty.

“It’s a win-win when employees can concentrate on serving customers, without worrying about how they are going to make rent or put food on their own table,” he says.

Greater customer satisfaction

“Our more experienced teams take better care of our guests,” says Sommers. “We’ve gained many new customers who have written us notes telling us how grateful they are that we treat our employees fairly. Those guests are visiting our business more frequently, further contributing to our bottom line.”

Sommers isn’t alone in thinking we should raise the minimum wage. A June 2014 survey found that more than 3 out of 5 small business owners support increasing the minimum wage to $10.10/hour, saying they believe that a higher minimum wage would increase consumer purchasing power (58%), help the economy (56%), and benefit their businesses via lower employee turnover, increased productivity, and customer satisfaction (53%).

How Raising the Minimum Wage Would Look

The Economic Policy Institute put out a report in August 2012 outlining who would benefit from an increase in minimum wage, looking at characteristics like gender, age, race and ethnicity, educational attainment, work hours, family income, and family composition. It also gave the estimated GDP and job creation impacts that would result from an increase in the federal minimum wage to $9.80/hour (not $10.10, which would be proposed by President Obama two years later).

Here’s what they found:

• Increasing the federal minimum wage would raise the wages of about 28 million workers, who would receive nearly $40 billion in additional wages over the phase-in period
• GDP would increase by roughly $25 billion during the phase-in period, resulting in the creation of approximately 100,000 new jobs
• Women comprise nearly 55% of those who would benefit
• Nearly 88% of workers who would benefit are at least 20 years old
• Workers of all races and ethnicities would benefit from the increase; non-Hispanic white workers comprise the largest share (about 56%) of those who would be affected
• About 42% of affected workers have at least some college education
• Around 54% of affected workers work full time
• Over 70% are in families with incomes of less than $60,000
• More than a quarter are parents
• Over a third are married
• The average affected worker earns about half of his or her family’s total income

Fast forward two years to 2014 and Obama’s State of the Union address. After the address, the White House put together an interactive web page detailing how raising the minimum wage would positively impact people across America. Some of the facts it lists include:

• A minimum wage increase would benefit more than 28 million workers across the country
• 19 million workers from all types of households would see a direct increase in their wages
• The real value of the minimum wage has fallen by nearly one-third since its peak in 1968; today, a full-time minimum wage worker makes $14,500 a year

Why Businesses Owners Are Against Raising the Minimum Wage

While many business owners are in favor of increasing minimum wage, more are actually against it. According to a 2013 Gallup poll, 50% of small business owners disapprove of a law that would raise the national minimum wage, compared to 47% who approved. Furthermore, 60% of small business owners think raising the minimum wage would hurt most small business owners.

Generally, arguments against raising the minimum wage fall into the three categories below:

Creates fewer jobs

When the minimum wage increased between 2007-2009 from $5.15/hour to $7.25/hour, small business owner Mike Beckett was hit hard. He had to lay off 5 of his 35 employees who worked at his small book store in New Mexico. When reflecting on those layoffs, Beckett said, “It was crippling to us….there were just all these things that happened.”

The Congressional Budget Office (CBO) released a report in early 2014 that confirmed Beckett's experience was not unheard of. The CBO report estimates that by increasing the minimum wage to $10.10/hour, there will be a loss of 500,000 jobs (which is about .3% of total jobs).

Increases consumer prices

Higher wages means it costs employers more money to operate their business. Many business owners offset these costs by passing them off to consumers.

The CBO report suggests that if goods/services cost more, then consumers will buy less of them, which hurts the economy overall.

Restaurants especially have passed the cost of minimum wage onto consumers by increasing menu prices. BloombergBusiness reports that "Cheesecake Factory operates about one-fifth of its restaurants in California, where it expects to sustain an additional $2 million to $3 million in costs from the state’s new minimum wage. This was part of the chain’s reasoning in boosting prices by 2 percent this year."

Squeezes out unskilled employees

Hiring unskilled employees and taking the time to train them can be an expensive process. If the minimum wage is increased, employers might not want to invest as much money in unskilled workers, which can lead to those employees being squeezed out of the job market.

US News argues, "Raising the minimum wage makes it harder for these inexperienced workers to find a job, because businesses will either eliminate positions or choose to hire someone with more experience at the higher mandated wage."

This leaves unskilled workers unable to find a job that will train them in marketable skills that will help them find a job later down the road.

Several studies have found conflicting results when it comes to the negative effects of increasing the minimum wage. To combat this, the DOL put out a fact sheet with “common myths” about raising the minimum wage, disputing many claims and offering new insights into the proposal.

Further Research on the Negative Effects of Raising the Minimum Wage

Business owners aren't the only ones against raising the minimum wage. Economists and academics have also come forward against a wage hike. Here are some of the concerns voiced by those against raising the minimum wage.

• A 1995 study by David Neumark and William Wascher found that New Jersey's 1992 minimum wage increase led to a 4.6% decrease in employment
• Harvard's Greg Mankiw writes about evidence that suggests raising the minimum wage has a particularly negative impact on employment opportunities for teens, quoting his economics textbook: “The typical study finds that a 10% increase in the minimum wage depresses teenage employment between 1 and 3%. In interpreting this estimate, note that a 10% increase in the minimum wage does not raise the average wage of teenagers by 10%.”

There are myriad opinions about raising the minimum wage, differing from person to person, company to company, and state to state. That said, there seems to be more support rather than criticism for raising the federal minimum wage. Many of the anti-raise arguments are challenged in this DOL fact sheet; and the fact that small and large businesses alike are already deciding to raise their minimum wages on their own accord makes it seem as if the “pro” of the debate is winning.