Currently, the federal minimum wage is set at $7.25, where it has been since 2009. The original minimum wage was set in 1938 at $0.25, or about $5.10 in nominal value, the value at the weight of current dollars. The highest nominal value was in 1970, when the federal minimum wage was set at $1.60, or $12.04 in today’s dollars. Since then, the value of the minimum wage has continued to decrease as inflation soars and politicians remain hesitant to raise the federal minimum wage from its 2009 assignment.
The numbers themselves show that it’s time to raise the minimum wage, but the issue isn’t as simple as just higher wages for entry-level workers. A minimum wage is what is known as a price floor, meaning that businesses are unable to set wages lower than it. When taxes are imposed or businesses find themselves in fiscal trouble, they must rely on hiring fewer workers instead of lowering wages to decrease labor costs. As a result, employed workers make more money, but the unemployment rate also goes up.
An essential factor in evaluating the effect of a higher federal minimum wage is how a potential increase would impact unemployment rates. The impacts are less drastic than you may think. When people have more money, they spend more. When more money is spent, there is more opportunity for job growth, mitigating the negative effects of raising the minimum wage. In fact, a study from the Economic Policy Institute predicted that raising the minimum wage to $10.10 could create 85,000 new jobs due to growth in Gross Domestic Product (GDP). This isn’t to imply that raising the federal minimum wage will result in net job growth, but instead that the positive indirect effects of raising it can help minimize the direct negative effects.
Another effect of an increased minimum wage, one that all political parties should generally enjoy, is the reduction of reliance on government social programs. Raising the minimum wage to $10.10 would mean 1.7 million Americans currently dependent on government assistance programs would no longer be. A more recent study estimates that annual government expenditures on public assistance programs, such as Earned Income Tax Credit and the Supplemental Nutrition Assistance Program, would decrease by anywhere between $13.4 and $31 billion if we raised the minimum wage to $15 by 2025. Republicans historically support lower funding for social programs and lower taxes, both of which are expected with this change. Democrats historically support spending on social programs, an action made much easier with the saved spending on EITC and SNAPS.
Aside from the projected effects on unemployment, critics of raising the federal minimum wage highlight another primary area where the burden would be passed: the price of consumer goods. Some studies predict that an increased minimum wage for employees could lead to a spike in prices at the businesses that employ them. This is an unappealing effect, particularly at a time when prices are already shooting up with inflation. Unfortunately, job layoffs and increased consumption costs will disproportionately affect low-cost communities as well, compared to wealthier cities that already have high minimum wages.
Although prices may rise, an increased minimum wage will give people more spending power. Higher wages will overall mitigate the effects of businesses sharing the burden with consumers. Additionally, a higher minimum wage increases worker productivity, diminishing the need to raise prices and spurring growth in affected businesses and areas.
There’s no way to know for certain what the effects of raising the federal minimum wage would be, whether it be to $10 or up to $15, as many people are fighting for. What we do know is that we have supported minimum wages of higher value in the past, and the evidence shows that the benefits outweigh the costs. It’s far past time to support low-wage populations in all areas of the United States, and allow people to make the livable wage everyone deserves.
Claudia Flynn is an Opinion Columnist and can be reached at claudf@umich.edu.