The Impact of the Increase in Minimum Wage on the Standard of Living
How it works
An increase in the minimum wage has many positives for the worker, but it presents the employer with many challenging financial and employment issues. A major problem presented is how employers compensate for having to pay employees higher wages. There are many ways businesses can adjust to paying employees higher wages, including increasing worker productivity, raising prices of goods or services, increasing revenue through economic growth, and redistributing revenue within the business. A major concern when raising the minimum wage is whether it will result in a decrease in employment due to businesses having to reduce their workforce to save money.
Hundreds of studies conducted to determine whether an increase in minimum wage has resulted in increased unemployment consistently show no significant change, according to “Minimum Wages,” “A $15 U.S. Minimum Wage: How the Fast-Food Industry Could Adjust Without Shedding Jobs,” “The Case of the Minimum Wage: Competing Policy Models,” and “What Does the Minimum Wage Do?”
One group of researchers suggested, “Measuring employment by the number of jobs is like measuring the total amount of water in different-sized pitchers by counting the number of pitchers.” This simile perfectly explains the observed lack of significant change in the employment rate following a minimum wage increase. This is because one of the biggest costs to a business is the hiring and firing of employees. So, when the minimum wage increases, there is often no reduction in the workforce, but instead a reduction in hours or layoffs, which doesn’t show up in the unemployment rate. However, the reduction in hours in “What Does the Minimum Wage Do” does not show significant changes due to an increase in minimum wage. The results are composed of analyses of several individual studies which collectively show that there is no significant change in working hours due to an increase in minimum wage. These studies cover nearly every group of people in the U.S, from teenagers aged 16 to 19, to female teenagers, single mothers, youths aged 25 and less, immigrants, low wage workers, and food industry workers.
If there is no significant change in employment or hours worked by employees following a wage increase, why does this topic consistently make headlines? The reason is simplistic. Employees working at minimum wage yearn for a pay increase to improve their standard of living, but businesses are reluctant to accede due to the potential impact on their profits. Legislators do not propose frequent increases in the minimum wage to appease workers because of the potential financial risks it poses to businesses, which could ultimately lead to job losses. So, how is the minimum wage determined? It is influenced by one of the most basic economic principles: supply and demand.
Minimum wage is set above the equilibrium point of wage amount and number of workers. An increase in the minimum wage occurs when the overall inflation of the economy has reached a point where the minimum wage is no longer sufficient to live off of. Inflation is not always detrimental; it can be a sign of a growing economy. The U.S. economy grows at approximately two to three percent each year, which explains the periodic minimal increases in minimum wage. Inflation and increases in the minimum wage are part of an endless cycle because as soon as the minimum wage catches up with the rate of inflation, inflation increases again.
According to the Merriam-Webster Dictionary, the standard of living is defined as “the necessities, comforts, and luxuries enjoyed or aspired to by an individual or group.” To understand how the standard of living can be changed by an increase in minimum wage, one must first understand the general types of people living on minimum wage and why they are earning the minimum wage. Of the 3.6 billion workers earning minimum wage, 24.1% are teenagers from the ages of 16-19, 64.4% are female, 36% work over 35 hours a week, 40% work in food preparation and serving-related fields, 15% are in sales-related occupations, nearly 75% have a high school degree, 17% have no high school degree, and 8% have a bachelor’s degree or higher. This information is crucial as it shows that people earning minimum wage are often people with little education and working jobs that require little skill. Although there was a small 8% of people with bachelor’s degrees or higher, it shows that gaining a higher education often results in higher wages.
An increase in minimum wage affects the standard of living in several ways. It influences the psychological aspect of families or individuals who live off minimum wage. One study indicates that household poverty is associated with higher levels of depression and antisocial behavior among children. Another report also highlighted that poorer people reported more instances of discrimination.
In 2013, with the minimum wage at $7.25 an hour, someone working full-time on this wage would earn $15,080 a year, qualifying as living below the poverty line of $16,057. Comparing the U.S. to other countries in terms of overall income, the U.S. was ranked second as of 2001 at $27,895, yet third overall in terms of its population living in poverty at 13.6%. Currently, the U.S. has an overall income of $51,759 per person. As economist David Cooper put it, “Minimum wage was designed to bring fairness to the labor structure, not fight poverty.” It is crucial to comprehend this because the objective of having a wage floor is to ensure that people living on minimum wage can see an improvement in their standard of living.
Research conducted over states that increased their minimum wage showed no significant change in the poverty rate. In the book “A $15 U.S. Minimum Wage,” the ripple effect theory is proposed, saying that an increase in minimum wage not only affects people living on minimum wage but also everyone above it. People previously working above the minimum wage had jobs that required more skill than those at minimum wage, therefore, to keep these employees satisfied, their pay must also increase. The ripple effect theory suggests that all workers would see an improvement in their standard of living. Another theory that has garnered much support, but isn’t frequently used, is the liberal conception.
This liberal conception suggests that individuals are at liberty to negotiate employment contracts that meet their needs, based on what they are able to offer to the employer. The liberal theory operates according to the principles that each individual is paid for what he or she is worth. If an individual is unsatisfied with the compensation for their work, they can either improve their skills to earn more or look for a new job. In a perfect world, this would be the ideal way for employers and employees to negotiate payment, however, this theory would not work well as there are many people in the U.S. who are uneducated. Uneducated people would be taken advantage of for their work, be paid little, and live well below the standard of living.