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Pros and Cons of Raising Minimum Wage

What is the federal minimum wage?

Is the minimum wage too high? Too low? Should you raise your entry-level employees’ wages beyond the federal/state minimums?

In 2009, the U.S. Congress passed the Fair Labor Standards Act, which established a $7.25 minimum hourly payment for non-tipped employees. Workers who receive tips must receive $2.13/hour in cash wages; if their hourly tips equal less than $7.25, their employers must make up the difference.

Though experts do not expect lawmakers to raise this amount in 2017, the Department of Labor has stated that federal contract employees will receive a minimum of $10.20 this year (tipped employees will get $6.80).

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Should we raise the federal minimum wage?

In 2014, President Obama proposed increasing the federal minimum wage from $7.25 to $10.10. He said this would improve the U.S. economy without reducing the number of available jobs. Opponents of this change point out a Congressional Budget Office report which says this wage increase would put half a million people out of work.

It’s confusing – diverse viewpoints, regional differences, and political positions surround this polarizing debate. If you find yourself scratching your head about this thorny issue, you aren’t alone. Business leaders of all stripes spend substantial time and effort understanding the “wage question” – especially the differences in federal and state mandates.

What is your state’s minimum wage?

Businesses, especially those doing business in many states must understand the various minimum wages set by state governments (which supersede the federal rate if greater than $7.25).

So far, 29 states and several urban areas have set minimum wages higher than the federal minimum, typically to address higher-than-average costs of living. Conversely, five southeastern states have not set state minimum wages. Georgia, however, has established a minimum wage ($5.15) – but only for employees exempt from the $7.25 FSLA minimum.

Which employees qualify for FSLA exemptions?

The FSLA minimum wage and overtime mandates may not apply to salaried employees who make over $455/week ($27.63/hour) and meet certain other conditions.

This exemption does not apply to manual laborers and public service workers like police officers, firefighters, and EMTs. However, it can apply to many white-collar workers.

Salaried employees like executives, administrators, highly-trained professionals, and computer programmers (as well as outside salespeople) may qualify for FSLA exemptions.

Pros of a Higher Minimum Wage

Raising the minimum wage on a regular basis helps families keep up with price inflation.
Putting more money in the hands of people who will readily spend it helps the economy.
Increased wages and spending raise demand and create more jobs.
Workers stay with employers longer (instead of seeking out better-paying work with other companies) reducing businesses’ turnover, hiring, and training costs.
Lower unemployment and higher wages increase tax revenues.
When workers earn higher wages, they rely less on governmental “safety net” programs.

Cons of a Higher Minimum Wage

Employers with tight budgets may lay off employees to remain solvent. Some employees would make more, but others would have to seek other employment – stressing the unemployment system.
Companies may pass on the cost of increased wages to consumers, in the form of price increases (the “scale effect”). This would raise the cost of living and create a need for further minimum wage increases.
Businesses may freeze new hires, limiting opportunities for recent college graduates and others entering (or re-entering) the job market.
Corporations may outsource more jobs to countries with lower (or non-existent) minimum wage standards.

Do Minimum Wage Statutes Reduce Poverty?

According to the CBO, raising the minimum wage to $10.10 would bring 900,000 people out of poverty. Though some people would lose their jobs, the working poor as a group would benefit. This raises a sticky question: is it appropriate to raise unemployment to help people out of poverty?

Given the power of the working-class voting block (as evidenced in the 2016 election cycle), lawmakers may well avoid raising the federal minimum wage.

Oddly enough, minimum wage increases (adjusted for the inflation they cause) raise the real income of most families (as compared to the poverty level). Only families that make over 6 times the poverty rate would see a decrease in real income if lawmakers raised the federal minimum wage.

Given this statistic, some would argue that the greatest resistance to minimum wage increases are not the working poor, but rather the richest members of society.

Others would argue that families live beneath the poverty line due to underemployment, not the minimum wage. Only 7% of families in poverty have a member that works full-time. Would creating more jobs (and more full-time jobs) bring more people into the labor force and raise the national standard of living?

Updating the Earned Income Tax Credit (EITC)

Only 20% of minimum wage earners live beneath the poverty line ($24,250 for a family of 4); two-thirds of them make twice this amount. For this reason, some experts say the EITC has a greater effect on the very poor than the minimum wage.

Raising the minimum wage without EITC upgrades would help many families, but not necessarily the poorest. Many minimum-wage workers are secondary earners with support from primary breadwinners who make a good deal more than they do.

How does the minimum wage affect people at all wage levels?

Raising the minimum wage creates a ripple effect throughout organizations – with positive and negative effects. For example, if you run a bialy (hole-free bagel) and coffee shop for early-rising lovers of Polish cuisine, an increase in the minimum wage from $7.25 to $10.10 per hour would affect all your workers (and your bottom line).

(Though a minimum wage increase wouldn’t happen all at once, let’s imagine it has for the sake of simplicity. To be fair, let’s also say that the economic stimulus effects of this increase have also taken place overnight.)

In your hypothetical business, you employ 6 workers:

3 bialy-slingers to work the counter and brew fresh pots of coffee
a bialy baker who brings the best of the old country to the U.S.
a baker’s assistant to put the holes back in the bagels
a manager to keep everything running smoothly

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Calculating the Effects of Minimum Wage Increases

Before a minimum wage increase, your counter workers made $7.25 per hour. The baker earned $10, the baker’s assistant got $8, and the manager got $12. Your total wages per hour (ignoring peak times, days off, etc.) equal $41.75:

Counter Staff [7.25 x 3] Bakers [18] + Management [12] = 51.75

With a minimum wage increase to $10.10, your total hourly payout would come to $60.30:

Counter Staff [10.10 x 3] Bakers [20.20] + Management [12] = 62.50

However, this situation would certainly lead to dissatisfaction among your more experienced and skilled workers. Your entire staff makes the same amount – and the baker’s assistant now makes as much as the baker!

To reward your experienced (and loyal) employees, you want to offer a variety of pay levels. Say you raise your baker’s wage to $12 and their assistant’s wage to $11. This puts the baker on par with the manager, so you raise their hourly pay accordingly to $14. Now, your total hourly wage payouts equal $66.30:

Counter Staff [10.10 x 3] Bakers [22] + Management [14] = 66.30

Compared to your previous total wages of 41.75, this is an increase of over 150%! If you’re running tight margins, how can you afford to stay in business? Would you even start such a business, knowing a minimum wage increase could cut deep into your profits?

Your bialy business could survive and thrive by marketing its carb-and-caffeine products to minimum-wage workers on their morning commutes. This segment of the consumer market—flush with cash—could spend more on AM treats, increasing demand for your products. Imagine – if you made twice the sales you did before this minimum wage increase, would a 150% increase in total wages really matter?

Should the Government Peg Minimum Wage Increases to Inflation?

By setting a minimum wage and setting it to increase with inflation, lawmakers would benefit small business owners who (like our hypothetical bialy-slingers) employ many employees at and near the minimum wage. These employers, who create almost 50% of U.S. private-sector jobs, would know to expect a small yearly increase in the minimum wage – and plan accordingly.

Instead of putting off the minimum wage issue until workers fall further and further behind and need large wage increases (a political “football”), the country would benefit from pegging the minimum wage to inflation and getting on with business. Neither employers nor employees would experience periods of feast and famine. This action would stabilize the long-term economy and encourage entrepreneurial investment.

Needless to say, smart businesspeople should stay abreast of the ever-important minimum wage issue. Track your work-hours, calculate billable hours, create comprehensive reports, and plan for periodical mandatory wage increases. The nation’s political and financial landscape will only continue to change!