Increasing the minimum wage has been a hotly-debated topic. The increase of minimum wage from US$7.25 to US $10.10 has quite strong and persuasive arguments in favor of it while its opponents also have their own arguments against the increase. According to a Congressional Budget Office (CBO) report, the minimum wage would increase from $7.25 per hour to $8.20 in 2014, to $9.15 in 2015 and $10.10 in 2016. After that, the minimum wage would be inflation-adjusted annually, based on the consumer price index.
According to ‘The Economic Case for Raising the Minimum Wage’ by the Council of Economic Advisers, the real value of minimum wage has fallen by a third from its peak in 1968. Again, the federal minimum wage is only 36 percent of the average wage while it was over 50 percent at its peak in 1968. The real value of minimum wage falling by a third indicates the precarious situation in which workers working at minimum wage find themselves. It further shows the importance of raising the income of minimum wage workers so that they can lead decent lives.
The presentation states that a higher minimum wage would increase the productivity of workers. A higher minimum wage leads to greater motivation among the workers as they feel they are receiving a fair wage. It also adds that the higher wage increases employee morale that boosts productivity. Again, a higher wage leads to lower labor turnover as the employees are already receiving a decent wage in their current jobs and are less prone to move to new jobs. The lower turnover reduces employers’ expenditure on recruitment and training of new employees. Also, the presentation cites research that indicates higher wages reduce work absenteeism; this further increases productivity of workers.
Minimum wage in the US is lower than other advanced economies. When the minimum wage is raised to $10.10, it is still slightly lower than other advanced economies, including Canada and the United Kingdom. A minimum wage of $10.10 would benefit over 28 million workers from various backgrounds. Of the 28 million workers, 19 million would benefit directly while the rest 9 million would be benefited indirectly. The minimum wage increase would help females more than males, 55 percent and 45 percent respectively. It would mostly help those between the ages of 20 to 29 (37 percent) while people with under $35,000 income would mostly benefit (46 percent). Among all family structures, those who are unmarried without kids would benefit the most (44 percent).
It must be mentioned that Earned Income Tax Credit had a substantial impact on poverty reduction. According to the presentation, the poverty rate would be 29 per cent without tax credits and benefits in 2012. This decreased to only 16 percent with tax credits and benefits. Therefore, Earned Income Tax Credit had a substantial impact on poverty reduction even when there were no wage gains. When the minimum wage is increased to $10.10, it would raise income of 12 million people now living in poverty and lift 2 million of them out of poverty. Combined with tax credits, the $10.10 minimum wage would allow 5 per cent of the people living in poverty to move above the poverty line.
According to the report, ‘The Effects of a Minimum-Wage Increase on Employment and Family Income’ by the Congressional Budget Office (CBO), the higher minimum wage would increase the earnings of low-wage workers by $31 billion. Of this amount, only 19 per cent would go to families with earnings below the poverty threshold.
The earnings of 16.5 million workers, who earn less than the proposed minimum wage, would increase. The higher minimum wage would increase real income by $5 billion for families whose income is currently below the poverty line. It would increase their average family income by 3 percent and move 900,000 people above the poverty line.
This would be a substantial achievement as currently 45 million people live below the poverty threshold. An additional $12 billion in additional real income would go to families whose income would have been one to three times the poverty threshold. Again, families whose income is three and six times the poverty threshold would gain an additional $2 billion.
However, families whose income is six times the poverty level or more would experience a decrease in real income by $17 billion. Therefore, the higher minimum wage is expected to have a redistributive effect. The higher minimum wage would reduce total employment by 500,000 workers which is only 0.3 per cent of total workers, according to the CBO report. This would decrease income of some people while others would gain because of the higher minimum wage. Overall, real income would rise by $2 billion.
The higher minimum wage would increase the labor cost of companies. Large companies would be able to absorb the higher cost without any significant change in their employment and production levels. However, small businesses may find the higher labor cost difficult to absorb.
This may lead to closure of small businesses and result in higher unemployment levels. Policy measures may be implemented to help small businesses that employ minimum wage workers so that both workers and business owners can sustain after the increase in minimum wage.
Also, retraining of workers and small business owners would allow them to make smooth transitions to new professions. This would reduce the economic and non-economic impacts on their lives due to the higher minimum wage. Overall, the higher minimum wage combined with Earned Income Tax Credit may prove to be helpful for low-income families to move above the poverty threshold.