By Sam Bondy
In Introduction to Microeconomics, we all learn that binding price floors, such as a minimum wage, create a surplus of workers. In this neoclassical model of supply and demand, unemployment is the result of this inefficiency.
The current federal minimum wage is set at $7.25 an hour. The White House’s goal is for it to be raised to $10.10, a roughly 39% increase. The nonpartisan CBO, or the Congressional Budget Office recently conducted a study on the possible consequences of this proposed minimum wage hike. According to their estimates, the change would “reduce total employment by about 500,000 workers.” But, it would also have the potential to lift about 900,000 out of “poverty.”
This reduction in employment would be most prevalent amongst low income earners whereas gains in wages would be apparent throughout the job market. Despite White House economists criticizing the study, Janet Yellen, the newly appointed Fed Chair, came out supporting the CBO’s findings. She made the claim that the CBO is “good at this kind of evaluation.”
Unfortunately, the CBO’s study suggests that the low-wage workers’ increased earnings (a total of $31 billion) will only result in only 19% ‘accruing’ to families below the poverty line. An even larger percent, around 29%, will go to families earning three times the poverty threshold. However, by 2016, about 16 million people will have these higher wages. In a time where the unemployment rate is staggering, and the labor participation rate is steadily decreasing, now might not be the time to try out this policy.
Warren Buffett has commented that, “If you could have a minimum wage of $15 and it didn’t hurt anything else, I would love it” and goes on to say, “But clearly that isn’t the case”. Many believe that huge corporations such as McDonalds and Wal-Mart, who for the most part pay minimum wage, encourage workers to seek out welfare assistance. This goes to show that some of these government programs can be seen as an indirect subsidy to big business. On top of which, many small businesses, who can’t afford to pay employees above the minimum wage will suffer. Maybe alternative programs, such as the widely supported EITC or Earned Income Tax Credit, should be focused on in lieu. The EITC, with broad bipartisan support might be the better program to expand.
The minimum wage varies in each state, as well as it should. The cost of living in New York City versus Cheyenne are vastly different, so are their unemployment rates. In Washington State for example, the minimum wage is $9.32; in fact, the minimum wage is above $7.25 in 20 states. Perhaps instead of raising the federal minimum wage, states should be able to choose their own respective minimum wages, but the federal government should feel free to make suggestions.
This issue is racked with controversy, both ethical and economical, and there is no one solution. Therefore additional studies, such as the CBO’s should be conducted just as more debates should be held, in order to demystify the effects of policy changes such as these. Although many times retrospect is the only accurate “predictor”, discourse and statistics can help pave the way.