Why is the minimum wage controversial?

The federal minimum wage was introduced in 1938 during the Great Depression under President Franklin Delano Roosevelt. It was initially set at $0.25 per hour and has been increased by Congress 22 times, most recently in 2009 when it went from $6.55 to $7.25 an hour. 29 states plus the District of Columbia (DC) have a minimum wage higher than the federal minimum wage. 1.8 million workers (or 2.3% of the hourly paid working population) earn the federal minimum wage or below.

Proponents of a higher minimum wage state that the current federal minimum wage of $7.25 per hour is too low for anyone to live on; that a higher minimum wage will help create jobs and grow the economy; that the declining value of the minimum wage is one of the primary causes of wage inequality between low- and middle-income workers; and that a majority of Americans, including a slim majority of self-described conservatives, support increasing the minimum wage.

Opponents say that many businesses cannot afford to pay their workers more, and will be forced to close, lay off workers, or reduce hiring; that increases have been shown to make it more difficult for low-skilled workers with little or no work experience to find jobs or become upwardly mobile; and that raising the minimum wage at the federal level does not take into account regional cost-of-living variations where raising the minimum wage could hurt low-income communities in particular. Read more background…

Pro & Con Arguments

The Economic Policy Institute stated that a minimum wage increase from the current rate of $7.25 an hour to $10.10 would inject $22.1 billion net into the economy and create about 85,000 new jobs over a three-year phase-in period. Economists from the Federal Reserve Bank of Chicago predicted that a $1.75 rise in the federal minimum wage would increase aggregate household spending by $48 billion the following year, thus boosting GDP and leading to job growth. A 1994 study by economists Alan Krueger, PhD, and David Card, PhD, compared employment in the fast food industry after New Jersey raised its minimum wage by 80 cents, while Pennsylvania did not. Krueger and Card observed that job growth in the fast food industry was similar in both states, and found “no indication that the rise in the minimum wage reduced employment.” Their findings were corroborated by economists Hristos Doucouliagos, PhD, and T.D. Stanley, PhD, in a review of 64 minimum wage studies. The authors found “little or no evidence of a negative association between minimum wages and employment.”

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A person working full time at the federal minimum wage of $7.25 per hour earns $15,080 in a year, which is 20% higher than the 2015 federal poverty level of $12,331 for a one-person household under 65 years of age but 8% below the 2015 federal poverty level of $16,337 for a single-parent family with a child under 18 years of age. According to a 2014 Congressional Budget Office report, increasing the minimum wage to $9 would lift 300,000 people out of poverty, and an increase to $10.10 would lift 900,000 people out of poverty. A 2013 study by University of Massachusetts at Amherst economist Arindrajit Dube, PhD, estimated that increasing the minimum wage to $10.10 is “projected to reduce the number of non-elderly living in poverty by around 4.6 million, or by 6.8 million when longer term effects are accounted for.”

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If low-income workers earned more money, their dependence on, and eligibility for, government benefits would decrease. The Center for American Progress reported in 2014 that raising the federal minimum wage by 6% to $10.10 would reduce spending on the Supplemental Nutrition Assistance Program (SNAP, formerly known as food stamps) by 6% or $4.6 billion. The Economic Policy Institute determined that by increasing the minimum wage to $10.10, more than 1.7 million Americans would no longer be dependent on government assistance programs. They report the increase would shave $7.6 billion off annual government spending on income-support programs.

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Because the federal minimum wage is not indexed for inflation, its purchasing power (the number of goods that can be bought with a unit of currency) has dropped considerably since its peak in 1968. The minimum wage in 1968 was $1.60, which is equivalent to $11.16 in Jan. 2016 dollars and which is 53.9% higher than today’s $7.25 federal minimum wage. Between July 2015 and the last increase in the minimum wage in 2009, the federal minimum wage lost 8.1% of its purchasing power to inflation. According to Liana Fox, PhD, Senior Analyst at the Economic Policy Institute, “inflation indexing guarantees low-wage workers a wage that keeps pace with the rising costs of goods and services.” Raising the minimum wage and indexing it to inflation would ensure that low-wage workers could adopt a standard of living commensurate with the current economy.

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While the estimates of how much the minimum wage should be increased vary, many economists agree that if it had kept pace with rising productivity and incomes, it would be higher than the current $7.25 an hour. According to a study by the Center for Economic and Policy Research (CEPR), the federal minimum wage would have been $21.72 per hour in 2012, instead of $7.25, if the minimum wage had kept pace with increases in productivity since 1968. The Institute for Policy Studies estimated in 2012 that personal income has grown by 100.6% since 1968, while the minimum wage has stagnated: “If our standard for minimum wages had kept pace with overall income growth in the American economy, it would now be $21.16 per hour.” The Economist stated in 2015 that “America as a whole is an outlier among advanced economies… one would expect America, where GDP per person is $53,000, to pay a minimum wage around $12 an hour. That would mean a raise of about 65% for Americans earning the minimum pay rate.”

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Among the 34 Organisation for Economic Cooperation and Development (OECD) member countries, the United States has one of the highest levels of income inequality, with only Chile, Mexico, and Turkey having higher levels of income inequality. In 2012 the richest 1% of the US population earned 22.83% of the nation’s total pre-tax income resulting in the widest gap between the rich and the poor since the 1920s. A 2015 study found that the decrease in the inflation-adjusted value of the minimum wage since the 1980s has been a contributor to America’s high levels of inequality. Isabel Sawhill, PhD, Senior Fellow in Economic Studies at the Brookings Institution, stated in 2014 that raising the minimum wage would reduce income inequality, and Jason Furman, PhD, Chairman of President Obama’s Council of Economic Advisers, stated in 2014 that the weakening value of the minimum wage “is one of the important [reasons]… for inequality at the bottom.”

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Despite representing 47% of US workers, women make up 63% of minimum wage workers. African Americans represent 12% of the US workforce, and make up 17.7% of minimum wage earners. 16% of the labor force is Hispanic, and they represent 21.5% of workers making the minimum wage. In a time when the median income for women is 78% of the national median income, and African Americans and Hispanics make 67% and 79% of the median income respectively, increasing the minimum wage is necessary to create a more equitable income distribution for disadvantaged groups.

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Melissa S. Kearney, PhD, and Benjamin Harris, PhD, of the Brookings Institution found that increasing the minimum wage would result in higher wages not only for the 3.7 million people earning minimum wage, but also for up to 35 million workers who make up to 150% of the federal minimum wage. Researchers at the White House Council of Economic Advisors (CEA) found that an increase to $10.10 an hour would raise wages for 28 million Americans–about nine million of those due to the ripple effect.

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Increases in wages are associated with increased productivity, according to many economists, including Janet Yellen, PhD, Chair of the Federal Reserve. Alan Manning, DPhil, Professor of Economics at the London School of Economics, stated in 2014: “As the minimum wage rises and work becomes more attractive, labor turnover rates and absenteeism tend to decline.” A 2014 University of California at Berkeley study found “striking evidence that… turnover rates for teens and restaurant workers fall substantially following a minimum wage increase,” declining by about 2% for a 10% increase in the minimum wage. A 2014 survey found that 53% of small business owners believed that “with a higher minimum wage, businesses would benefit from lower employee turnover and increased productivity and customer satisfaction.”

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According to a 2015 report from the National Low Income Housing Coalition, a worker must earn at least $15.50 an hour (over twice the federal minimum wage) to be able to afford to rent a “modest” one-bedroom apartment, and $19.35 for a two-bedroom unit (more than 2.5 times the minimum wage). The report stated: “In no state can an individual working a typical 40-hour work week at the federal minimum wage afford a one- or two-bedroom apartment for his or her family.” In California in 2015, even a person earning the then state minimum wage of $9 per hour would need to work 92 hours a week to afford to rent a one-bedroom apartment. In Rawlins County, Kansas, where rental costs are some of the most affordable in the country, a living wage including housing costs for one person with no dependents is estimated by the Massachusetts Institute of Technology to be $9.35, 25.3% higher than the federal minimum wage and the state minimum wage of Kansas.

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According to a 2013 poll by Oxfam America, 66% of US workers earning less than $10 an hour report that they “just meet” or “don’t even have enough to meet” their basic living expenses, and 50% say that they are frequently worried about affording basic necessities such as food. A 2015 report by the Alliance for a Just Society, found that “the federal minimum wage of $7.25 per hour represents less than half of a living wage for a single adult” and a worker supporting only himself would have to work 93 hours a week at the federal minimum wage in order to make ends meet “or skip necessities like meals or medicine.”

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A 2014 Human Impact Partners study by Rajiv Bhatia, MD, found that raising the Californian minimum wage to $13 an hour by 2017 would “significantly benefit health and well-being.” The study found that those earning a higher minimum wage would have enough to eat, be more likely to exercise, less likely to smoke, suffer from fewer emotional and psychological problems, and even prevent 389 premature deaths a year. A 2014 study by the Bay Area Regional Health Inequities Initiative (BARHII) found that minimum wage workers are more likely to report poor health, suffer from chronic diseases, and be unable to afford balanced meals. The study concluded that “policies that reduce poverty and raise the wages of low-income people can be expected to significantly improve overall health and reduce health inequities.” Edward Ehlinger, MD, State Health Commissioner for Minnesota, stated that raising the Minnesotan minimum wage from $6.15 an hour to $9.50 by mid-2016 was probably “the biggest public health achievement… in the four years I’ve been health commissioner… If you look at the conditions that impact health, income is right at the top of the list… Anything we can do to help enhance economic stability will have a huge public health benefit. This is a major public health issue.”

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A 2014 study found that raising the Californian minimum wage to $13 an hour would increase the incomes of 7.5 million families, meaning fewer would live in poverty. Teens who live in poverty are twice as likely to miss three or more days of school per month compared to those who do not; thus raising the minimum wage and lifting families out of poverty would mean children would miss fewer school days. The study found that “recent experimental studies show that increasing income can improve school performance.” Increasing the minimum wage would allow teens to work fewer hours for the same amount of pay giving them more time to study and reducing the likelihood that they would drop out of high school. A 2014 study by Alex Smith, PhD, Assistant Professor of Economics at the United States Military Academy at West Point, found that “an increase in the minimum wage from $7.25 to $10.10 (39%)… would lead to a 2-4 percentage point decrease in the likelihood that a low-SES [socio-economic status] teen will drop out.”

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According to Aaron Pacitti, PhD, Associate Professor of Economics at Siena College, raising the minimum wage would help reduce the federal budget deficit “by lowering spending on public assistance programs and increasing tax revenue. Since firms are allowed to pay poverty-level wages to 3.6 million people — 5 percent of the workforce — these workers must rely on Federal income support programs. This means that taxpayers have been subsidizing businesses, whose profits have risen to record levels over the past 30 years.” According to James K. Galbraith, PhD, Professor of Government at the University of Texas in Austin, “[b]ecause payroll- and income-tax revenues would rise [as a result of an increase in the minimum wage], the federal deficit would come down.”

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According to an Apr. 2016 study by the Executive Office of the President’s Council of Economic Advisors, “higher wages for low-income individuals reduce crime by providing viable and sustainable employment… raising the minimum wage to $12 by 2020 would result in a 3 to 5 percent crime decrease (250,000 to 540,000 crimes) and a societal benefit of $8 to $17 billion dollars.” A 2013 study found that living wage ordinances “lead to modest reductions in expected robbery, burglary, larceny, and MVT [motor vehicle theft] rates.” Researchers who studied crime rates and the minimum wage in New York City over a 25-year period found that “[i]ncreases in the real minimum wage are found to significantly reduce robberies and murders… a 10 percent increase in the real minimum wage results in a 6.3 to 6.9 percent decrease in murders” and a 3.4 to 3.7 percent decrease in robberies.

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The Congressional Budget Office projected that a minimum wage increase from $7.25 to $10.10 would result in a loss of 500,000 jobs. In a survey of 1,213 businesses and human resources professionals, 38% of employers who currently pay minimum wage said they would lay off some employees if the minimum wage was raised to $10.10. 54% said they would decrease hiring levels. San Francisco’s Office of Economic Analysis said that an increase to $15 would reduce the city’s employment by about “15,270 private sector jobs.” In 2014, Steve H. Hanke, PhD, Professor of Applied Economics at Johns Hopkins University, surveyed the 21 European Union (EU) countries that have a minimum wage and found they had an average unemployment rate of 11.8%, about a third higher than the 7.9% average unemployment rate in the seven EU countries that have no minimum wage.

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A study from the Federal Reserve Bank of Cleveland found that although low-income workers see wage increases when the minimum wage is raised, “their hours and employment decline, and the combined effect of these changes is a decline in earned income… minimum wages increase the proportion of families that are poor or near-poor.” As explained by George Reisman, PhD, Professor Emeritus of Economics at Pepperdine University, “The higher wages are, the higher costs of production are. The higher costs of production are, the higher prices are. The higher prices are, the smaller the quantities of goods and services demanded and the number of workers employed in producing them.” Thomas Grennes, MA, Professor Emeritus at North Carolina State University, and Andris Strazds, MSc, Lecturer at the Stockholm School of Economics in Riga (Latvia), stated: “the net effect of higher minimum wages would be unfavorable for impoverished households, even if there are no job losses. To the extent that some poor households also lose jobs, their net losses would be greater.”

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60% of small-business owners say that raising the minimum wage will “hurt most small-business owners,” according to a 2013 Gallup poll. Jamie Richardson, MBA, Vice President of fast food chain White Castle, said that the company would be forced to close almost half its stores and let go thousands of workers if the federal minimum wage were raised to $15. Forbes reported that an increase in the minimum wage has led to the closure of several Wal-Mart stores and the cancellation of promised stores yet to open.

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A 2013 article by the Federal Reserve Bank of Chicago stated that if the minimum wage is increased, fast-food restaurants would pass on almost 100% of their increased labor costs on to consumers and that other firms may do the same. A 2015 Purdue University study found that raising the wage of fast food restaurant employees to $15 or $22 per hour would result in a price increase of 4.3% and 25% respectively, or a reduction in product size between 12% and 70%: “a hamburger would be much smaller,” the researchers stated. NBC News found that the price of a cup of coffee went up by 10 to 20% in Oakland, California, after a 36% minimum wage hike in the city to $12.25. The report also found a 6.7% rise in coffee prices in Chicago after the minimum wage rose to $10. The Alberta Hotel and Lodging Association (Canada) found that a “sudden and significant increase to the minimum wage” would result in “[i]ncreased prices for food & beverage, guest rooms and meeting facilities.”

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Minimum wage workers are disproportionately young. According to the Pew Research Center, 16- to 24-year-olds make up 50.4% of minimum wage earners, despite representing only 13.7% of the workforce as a whole. 24% of minimum wage workers are teenagers. Matthew Rousu, PhD, Associate Professor of Economics at Susquehanna University, wrote in a 2014 article that the federal minimum wage “has a devastating impact on teenagers” because firms will not pay many young workers with no skills or experience minimum wage, let alone a higher wage. Casey B. Mulligan, PhD, economics professor at the University of Chicago, stated that the teenage employment index fell sharply after the minimum wage increase of July 2009 (a fall of about 8% in three months, while the previous drop of 8% took over a year): “This suggests that the 2009 minimum-wage increase did significantly reduce teenage employment.” According to a study by Thomas A. Mroz, PhD, and Timothy H. Savage, PhD, for the Employment Policies Institute, “those experiencing unemployment at an early age have years of lower earnings and an increased likelihood of unemployment ahead of them.”

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From an employer’s perspective, people with the lowest skill levels cannot justify higher wages. A study by Jeffrey Clemens, PhD, and Michael J. Wither, PhD, found that minimum wage increases result in reduced average monthly incomes for low-skilled workers ($100 less during the first year following a minimum wage increase and $50 over the next two years) due to a reduction in employment. James Dorn, PhD, Senior Fellow at the Cato Institute, stated that a 10% increase in the minimum wage “leads to a 1 to 3 percent decrease in employment of low-skilled workers” in the short term, and “to a larger decrease in the long run.” George Reisman, PhD, Professor Emeritus of Economics at Pepperdine University, stated that if the minimum wage is increased to $10.10, “and the jobs that presently pay $7.25 had to pay $10.10, then workers who previously would not have considered those jobs because of their ability to earn $8, $9, or $10 per hour will now consider them… The effect is to expose the workers whose skills do not exceed a level corresponding to $7.25 per hour to the competition of better educated, more-skilled workers presently able to earn wage rates ranging from just above $7.25 to just below $10.10.”

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Don Boudreaux, PhD, Adjunct Scholar at the Cato Institute, explained, “the minimum wage cuts off the first rung of the employment ladder, and it’s that first lowest paying rung that provides the skills and experience workers need to reach the next rung and to continue climbing their way to a better life.” Seth Zimmerman, PhD, Assistant Professor of Economics at the University of Chicago, stated: “minimum wage laws can lead to labor market rigidities that make it more difficult for people to move up the economic ladder. These rigidities can decrease relative mobility and… can decrease absolute upward mobility as well.” John W. O’Neill, PhD, Director of the School of Hospitality Management at Pennsylvania State University, stated that an increase in the minimum wage to $10.10 or higher would “decrease opportunities for upward mobility in the hospitality industry [where] entry-level, hourly roles are traditional ‘routes to the top’,” and where workers learn the skills needed to gain a promotion.

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If companies cannot afford to pay a higher minimum wage for low-skilled service employees, they will use automation to avoid hiring people in those positions altogether. Oxford University researchers Carl Benedikt Frey, PhD, and Michael A. Osborne, DPhil, stated in a 2013 study that “robots are already performing many simple service tasks such as vacuuming, mopping, lawn mowing, and gutter cleaning” and that “commercial service robots are now able to perform more complex tasks in food preparation, health care, commercial cleaning, and elderly care.” As attorney Andrew Woodman, JD, predicted in his blog for the Huffington Post, a minimum wage increase “could ultimately be the undoing of low-income service-industry jobs in the United States.” The Washington Post observed that as minimum wage campaigns gain traction around the country, “Many [restaurant] chains are already at work looking for ingenious ways to take humans out of the picture, threatening workers in an industry that employs 2.4 million wait staffers, nearly 3 million cooks and food preparers and many of the nation’s 3.3 million cashiers.”

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In 2015 Mississippi had the lowest cost of living at 83.5% of the national average, while Hawaii had the highest at 168.6%. In areas like Mississippi where the cost of living and average incomes are especially low, employers would need to spend proportionally more to pay their minimum wage employees than employers in higher cost areas like Hawaii, and yet would be unable to cover the cost by raising prices because their customers would not be able to afford them. According to Andrew G. Biggs, PhD, and Mark J. Perry, PhD, of the American Enterprise Institute, the results of this disparity “could be disastrous… [for] small communities around the country.”

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In cities such as Los Angeles with a limited housing supply, raising the minimum wage but not increasing housing stock would lead to an increase in rental prices as “700,000 minimum wage workers will have more money to compete for the same low inventory of rental units,” according to researchers from the University of California in Los Angeles. One Los Angeles-based blogger estimated a raise in rental prices by $173/month if the minimum wage was increased to $15/hour. Lucas Hall, founder of Landlordology.com, stated: “Raising the minimum wage causes a temporary spike in spending power… Landlords raise rents as tenants are willing and able to pay more.”

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A survey by the Small Business Network found that 82% of small businesses agreed that “the government should not be setting wage rates.” According to Per Bylund, PhD, Research Professor at Baylor University, the federal minimum wage “disrupts the balance of the market and prohibits the creation of new jobs.” Bylund stated that the free market should determine wages based on the value of work produced so employers can hire the needed number of workers at wage levels that make sense for their businesses. According to Mark J. Perry, PhD, of the American Enterprise Institute, government-mandated minimum wages “are always arbitrary and almost never based on any sound economic/cost-benefit analysis… [I]n contrast market-determined wages reflect supply and demand conditions that are specific to local market conditions and vary widely by geographic region and by industry.” Perry said market-determined wages result in more employment opportunities for unskilled workers, increased profits for companies, and lower prices for the consumer.

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According to James Sherk, MA, Senior Policy Analyst at the Heritage Foundation, a single mother working full time and earning the federal minimum wage of $7.25 an hour would be over $260 a month worse off if the minimum wage were raised to $10.10: “While her market income rises by $494, she loses $71 in EITC [earned income tax credit] refunds, pays $37 more in payroll taxes and $45 more in state income taxes. She also loses $88 in food stamp benefits and $528 in child-care subsidies.” A 2014 study of 400 US Chief Financial Officers (CFOs) by Campbell Harvey, PhD, J. Paul Sticht Professor of International Business at Duke University, found that 40% of CFOs would reduce employee benefits if the minimum wage were raised to $10 an hour. Some staff at the Seattle-area nonprofit organization, Full Life Care, asked for a reduction in hours after the minimum wage was raised, citing concerns that the increase will mean they lose their housing subsidies yet they are still unable to afford market-rate rents.

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Mark J. Perry, PhD, of the American Enterprise Institute states that “the attraction to higher wages from minimum wage legislation reduces high school completion rates for some students with limited skills, who are then disadvantaged with lower wages and career opportunities over the long-run if they never finish high school.” A 2009 study published in the American Journal of Economics and Sociology found that in Maryland, “a 25-cent increase in the real minimum wage… was associated with a 0.55 percent increase in the dropout rate for Hispanic” students. A 2005 study published by Cornell University found that “a longterm 10% increase in the earnings of low-skilled workers could decrease high school enrollment rates by as much as 5-7%.” According to a 2003 study by economists David Neumark, PhD, and William Wascher, PhD, in states where teens can leave school before 18, a 10% increase in the minimum wage caused teenage school enrollment to drop by 2%.

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According to the Statistic Brain Research Institute, 2,382,000 US jobs were outsourced in 2015 with 44% of companies saying they did so to reduce or control costs. A 2014 study of 400 US Chief Financial Officers (CFOs) by Campbell Harvey, PhD, J. Paul Sticht Professor of International Business at Duke University, found that 70% of CFOs would “increase contracting, outsourcing, or moving actual production outside the United States” if the minimum wage were raised to $10 an hour.

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According to a 2013 study by Boston College economists, increasing the minimum wage leads to reduced employment which leads to an increase in thefts, drug sales, and violent crime. Their results indicate that “crime will increase by 1.9 percentage points among 14-30 year-olds as the minimum wage increases.” Researchers found that between 1977 and 2012 increases in the minimum wage resulted in “no significant change” in the rates of violent crime or property crime.

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