The Econ-versation: What you need to know about minimum wage

The federal minimum wage was last revised in 2009 and is currently $7.25 an hour, meaning that no employee is allowed to be paid below this level. However, various states, cities, and individual companies have set their minimum wages above this level. For example, New York City’s minimum wage is $15 an hour, while the state of California’s minimum wage is $12 per hour. Likewise, corporations are also raising their minimum pay rates; Amazon raised their minimum hourly wage to $15 in 2018 and Bank of America raised their own to $17 last May, with plans to raise it to $20 in the next two years.

Many Democrats support the “Fight for $15” movement, which would raise the federal minimum wage to $15 an hour. This policy aims to provide a living wage for American workers, reduce inequality, increase worker productivity and increase consumer spending, thus stimulating the economy.

In contrast, conservatives are wary of the benefits of a higher minimum wage, arguing that raising it may reduce jobs for low-wage workers because employers are unable to afford as many employees as before. They also believe that raising the minimum wage would either put companies out of business or force them to increase the prices of goods to keep up with the rising costs of labor.

The debate continues among economists, as raising the wage above the equilibrium in the classic supply and demand model predicts job loss. However, a growing body of high-quality research demonstrates that increases in the minimum wage in the United States leave employment levels essentially unchanged, while providing workers the benefit of higher incomes.

One notable study conducted by economists at the University of Massachusetts Amherst assessed 138 state-level minimum wage changes from 1979 to 2016. They concluded that the amount of low-wage jobs remained at the same level five years after each of the minimum wage increases. They also found that, in general, low-wage workers saw about a 7 percent gain in wages.

Conversely, a frequently-cited study by the Congressional Budget Office (CBO) provides evidence of widespread job loss as predicted by the supply and demand model. It estimates that while a minimum wage increase to $15 would pull 1.3 million people out of poverty and give higher pay to about 17 million workers, it would also cut jobs for up to 3.7 million workers. However, it is critical to note that this study offers projections based on a model that assumes that higher wages tend to reduce employment. Therefore, it does not hold as much weight as studies analyzing the actual effects of minimum wage changes.

The efficiency wage effect is a potential explanation for the inconsistency between the supply and demand model and the data. This idea holds that an increase in workers’ wages will increase their productivity, thereby increasing demand for workers. The increased demand then offsets any job loss that was projected to occur.

To further complicate the minimum wage debate, some politicians such as Representative Terri Sewell (D- Ala.) proposed a regionally-tiered minimum wage which would establish various minimum wages across the nation based on the cost of living and purchasing power – the value of money in terms of buying goods or services. While this is compelling, it would be challenging to implement as it would be difficult to determine minimum wages all across the country. Furthermore, regional minimum wages are subject to loopholes, as businesses can move their production to nearby areas with lower minimum wages.

Although it is frequently overlooked in the minimum wage debate, it is important to consider the political economy perspective. Political economists maintain that employers do not hire based on the wage rate but based on how many workers they need. These analyses also reject the supply and demand model as they believe wage changes are not driven by supply and demand, but instead are driven by the power dynamic between employers and employees. This power dynamic is affected by factors such as the balance of political power, market conditions, and the presence of labor unions. Since the power of labor unions has declined in the United States, workers tend to have less influence on the determination of wages.

Extending on this discussion, tipped workers have a subminimum wage of $2.13 an hour. If the sum of their tips plus the subminimum wage does not equal the federal level, the employer must pay the difference to the employee. Since the subminimum wage is low, there is also a push to raise the subminimum wage for tipped workers.

Some believe that the subminimum wage encourages harassment of tipped workers and allows businesses to more easily take employees’ tips. However, others believe that tampering with the subminimum wage for tipped workers would lessen the number of tips they receive, lower their total income, and put companies, such as restaurants, out of business.

Overall, since the minimum wage is a point of contention, its future direction may be difficult to predict in the coming years as policymakers put forth varying solutions and ideas.

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