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Raising the Minimum Wage Despite Modern Misconceptions

The classic argument against raising minimum wage is a competitive economic model,

the basic economic model that misconstrues the important and detrimental aspects of the modern

economy and the greed that is employed by large corporations and their prime investors. The

perversion of the model funnels many that are less informed on how economics and ethics work

into holding on to the false belief that minimum wage is an elitist motive disguised as a liberal

and humanitarian idea that actually destroys the opportunities of the less accredited, mostly

citing detriments to the polar extremes of the labor market, the young and the elderly

demographics, who would supposedly be willing to work for less cash than employers are

willing to pay them with a minimum wage standard as they will lose too much profit from

employing and buying their unskilled services. This is a false assumption. There are many

complicated factors that contribute to any change in base and required pay. While there may be

some adverse effect to small business owners, when appropriate measures such as wage increase

that is modest and adjusted to fluctuate with inflation, "wage compression" or decrease in wage

of higher earners, and small price increases are taken, raising the minimum wage causes zero or

statistically insignificant fluctuations in the job market when applied to corporate monopolies

like McDonalds.

The basic competitive model of the potentially adverse effect of minimum wage is

displayed on the left (Wilson). The independent variable is represented with Employment, and

the dependent variable is the Wage Rate. Line DD is the Market Demand curve. When wages are

higher, the demand for the labor at those costs decrease, and when the wage is low, the employer

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will happily hire more employees at a slavish expense, which creates a negative correlation in

this model. SS is the Market Supply curve. When the wage is low, there will not be many people

willing to pimp their labors out for such nominal prices. As wage increases, there is much more

competition for the position to be filled, thus producing a positive correlation in the graph. Wc is

the competitive wage and Ec is the competitive employment, where the demand for labor and

supply of workers in terms of wages creates an equilibrium. When minimum wage is

theoretically increased to Wm in this model of interpretation and market prediction, the

employment at point A is lowered, represented by line Em where the new demand and supply

cross on the Market Demand curve, and also causes an excess supply of laborers (BC) that is

larger than the demand for laborers represented by line AC. The excess supply of laborers

supposedly decreases the number of hours available to work and the number of jobs offered

(AB). This type of study and critique or the economic effect of raising minimum wage is what

influenced Neumark and Wascher's research to presume that "...the preponderance of evidence

supports the view that minimum wages reduce the employment of low-wage workers" (104).

Since this study, economist have been at a bipartisan divide between whether or not

minimum wage truly effects employment, though

it seems that recent research supports the position

that there is no adverse effects of minimum wage

increase under controlled circumstances. Paul

Wolfson and Dale Belman conducted a meta-

analysis (left) of publications from economists on

the debate since 2000, rating different studies by

their variations in rigorous methodologies, concluding that, "The largest in magnitude are...

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positive [and] statistically significant... Several are economically irrelevant though statistically

significant and several others [are] slightly larger but...statistically insignificant" (10) in term of

employment.

How could it be that the abundance of recent studies all show zero to statistically

irrelevant changes in employment, when the competitive model tends to argue otherwise?

According to John Schmitt,” If the only channel of adjustment available is employment, the

competitive model implies that binding minimum wages will reduce employment. But, the

existence of other possible channels of adjustment means that minimum wages could have little

or no effect on employment, even within a standard competitive vision of the labor market,” such

as minor adjustments to pricings, minimal enough to not discourage the consumer, possible

slashes or reductions to non-wage benefits, shifts in the composition of employment and minor

wage equalization to those who make above the minimum (Schmitt 12).

The antiquarian competition model fails to predict trends outside of its simplistic

economic standards. Productivity and value of increased will to provide higher quality labor has

the potential to rise dramatically when employees are offered a wage that they can support

themselves on in a modern age. In a data brief in July 2012 by the National Employment Law

Project, Big Business, Corporate Profit, and the Minimum Wage, the current wage of $7.25 “in

terms of purchasing power,” has a value that is “30 percent lower today than it was in 1968” (1),

while large corporations are reporting record profits in 2011 at a combined $1.97 trillion (Reilly).

If the minimum wage were increased, big businesses like McDonalds could see employees’

efficacy rise to reorganize and restructure work environments to produce higher performance

standards from the increased motivation from employees due to the want to keep their jobs or the

reciprocity of the increased pay, and greater work intensity as well (Schmitt, 12). The

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competitive model also assumes that the workplace is operating at its greatest efficiency with

perfection, having no room for improvement because it is too costly to implement new strategies

and maintain practices that continually maximize efficiency (Kaufman 3). Another important

factor in the increase of the minimum wage is that it gives more spending power to the low wage

workers, increasing the economic stimuli and potentially offsetting the wage increase, though not

entirely. As big companies like McDonalds increase their base pay, “economists generally

recognize that low-wage workers are more likely than any other income group to spend any extra

earnings immediately on previously unaffordable basic needs or services” (Hall, 7), increasing

their profit in the industry through a direct correlation with the increase in wage.

When looking at the statistics of how previous wage increases have affected companies,

we find a very minimal increase to the overall increase in how much a large corporation would

spend in the actual increase of the percentage that a bill passes. In 2009, the minimum wage was

increased to $7.25, a 10.7% increase from 2008’s $6.55 minimum wage. The bill for the wage

increase was 1.9 billion dollars a year through a pool of roughly 2,407,638 people, with the total

sum being 34.5 billion, only a 0.03% increase in the total wage bill for all companies affected by

the bill. According to Schmitt, “relative to the total wage costs in the economy (that is including

the wages of all employees, not just those earning the minimum wage), the wages costs of recent

minimum-wage increases are very small” (15).

The offset in the wage bill that raising the minimum wage would create can be dealt with

through multiple facets, and is not that incredibly complex. There are many regulations that can

be established to ensure financial security that have been thoroughly tested and proven effective.

Of these many possible channels, it is likely that a couple may be implemented, but the benefit of

raising the wage seems to outweigh the costs greatly.

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Since raising the minimum wage does not increase the cost of hiring new workers, and

instead raises the costs per hour of work, many managers would opt to decrease the number of

hours worked by low-wage employees, instead of decreasing the amount of workers on payroll

(Michl 4). Even in a competitive framework market, the standard of living may increase for

minimum wage employees even with decreased hours. If minimum wage were increased 20%

and an employer decreased the number of hours worked by 10%, an employee who was working

20 hours a week, now works 18 yet experiences an 8% increase in his pay. Even if the hourly cut

was so large as to exactly offset the increase in wage, their standard of living would not decrease

until their hours were cut steeper than their rise in wage, and in the evidence deduced by Dube,

Lester, and Reich, “the fall in hours is unlikely to be large" (956).

Employers may also respond to an increase in minimum wage by cutting or reducing

nonwage benefits. In relation to a company like McDonalds, there was usually no cut in the most

common nonwage benefits offered, such as free or low priced meals (Card and Krueger 10).

Raising the minimum wage usually has no effects on nonwage benefits, with Simon and

Kaestner reporting that minimum wage has “had no discernible effect on fringe benefits

(specifically, on the receipt of health insurance, on whether the employer paid the whole

premium cost, on whether family health insurance was provided, and on receipt of employer

pensions)" (67), though it is a possible response to the wage bill increase.

“Upgrading” the level of skill required for the job with a new minimum wage would

allow employers to receive more skilled laborers to increase the yield of productivity from the

same job offered at a lower wage, which would seemingly be at a disadvantage to the youth, the

uneducated, and minorities, unfortunately. Allagretto, Dube, and Reich conducted their own

study covering the employment effect of wage increase on white, black, and Hispanic teens from

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1999 through 2007, however, finding that through three recessions and three minimum wage

increases, there was no statistically significant effect on employment for teens or any of the three

ethnic groups separately (228). Using a similar methodology, Dube, Lester and Reich also

concluded in 2012 that there was no evidence to support a change in the restaurant sector’s

composition in terms of gender or age makeup due to increased minimum wage.

In a purely competitive model, economic theory predicts that at least a portion of the

increased wage will be passed on to the consumers, resulting in a price increase for merchandise.

Sara Lemos reviewed more than 30 academic papers on the price effects of minimum wage, and

found that a “10% US minimum wage increase raises food prices by no more than 4% and

overall prices by no more than 0.4%" (208), effectively increasing the wage of employees and

the price of products without a bid impact on the job market or inflation. The pricings of the food

industries with a high share of low-wage workers such as McDonalds would be likely to

experience prices that increase only slightly, and Lemos, Aaronson, French, and MacDonald

confirm in their studies “that a 10 percent increase in the minimum wage increases prices by

roughly 0.7 percent" (542).

Wage compression would be a huge catalyst for the increase in pay for minimum wage

earners in a business like McDonalds, as the top executive makes $4.1 million a year in

compensation alone, $6 billion in dividends and share buybacks, and about $2,000 an hour in

compensation (NELP). In the wake of a federally mandated minimum wage increase, the

unequivocally and inequitably rich executives could distribute even a fraction of their wealth to

help diminish the gap in profit. Corporations can delay or limit pay raise and bonuses for the

“more experienced” workers who make well above the minimum wage without any detriment to

their standard of living.

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Taking a reduction in profit for a company may also be a minor solution to an increase in

minimum wage, but there is curiously a lack of any research on the effects of this medium of

adjustment, because it is unlikely to happen. Big companies often only make about 1% in profit,

but that profit margin is gigantic. Since the recession of 08, McDonalds has not only recovered

from the financial catastrophe, but are now posting record breaking profits. McDonalds employs

almost a million low-wage workers, and yet their top executive makes over 4 million a year in

compensation alone. If they are comfortable with supporting this elitist agenda for perpetuating

classism, I doubt there would be any way they would dive into their profits to give to their

struggling employees, sadly.

When using a basic competitive model to decode if raising the minimum wage is

a benefit to companies or not, the answer seems obvious. But life is never as simple as a small

graph. There are many options that employers have when facing federal mandate for increased

wages and the financial backlash it may cause. When looking at things statistically though, the

increase is rather modest compared to the expenses paid to the upper echelon who still often

receive huge bonuses and pay increases with no debate as to their effects on the economy and

company as a whole. McDonalds and other huge corporations simply refuse to pay attention to

the needs of those who are less fortunate and undereducated, taking advantage of them at even

turn possible, and lobby against pay reformation. If the minimum were raised and tacked to vary

with inflation, large companies could easily restructure their monetary systems to reach

equilibrium with record breaking profits in the hundreds of millions. It may be harder for smaller

businesses to make some of these changes, which raises the question of perhaps not making the

minimum wage apply to them and perhaps only be applicable to companies that make a certain

amount of profit or employ a certain percentage of low-wage employees. At any rate, the

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standard of living is changing with increased bills, and yet wage remains stagnant. This essay

describes only in brief some of the possible ways that large corporate monopolies could easily

implement and keep up with a wage increase, but I fear greed may never truly let the seemingly

oppressed live in peace.

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Works Cited

Daniel Aaronson, Eric French, and James MacDonald, "The Minimum Wage, Restaurant Prices, and Labor Market Structure" Federal Reserve Bank of Chicago, 2004. Web. Nov. 2013.

Card, David and Alan Krueger. 1994. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania." American Economic Review 48.4 (1994): 772-793. Web. Nov. 2013.

David Reilly, “U.S. Tax Haul Trails Profit Surge,” Wall Street Journal, Jan. 4, 2012. Web. Nov. 2013

Doucouliagos, Hristos and T. D. Stanley. "Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis." British Journal of Industrial Relations 47.2 (2009): 406-428. Nov. 2013

Dube, Arindrajit, T. William Lester, and Michael Reich. "Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties." Review of Economics and Statistics 92.4 (2010): 945-964. Web. Nov. 2013.

Hall, Doug and David Cooper. "How raising the federal minimum wage would help working families and give the economy a boost." Washington, DC: Economic Policy Institute Issue Brief 341. 2012. Web. Nov. 2013.

Kaufman, Bruce E. "Institutional Economics and the Minimum Wage: Broadening the Theoretical and Policy Debate." Industrial and Labor Relations Review 63.3 (2010): 427-453. Web. Nov. 2013.

Lemos, Sara. "A Survey of the Effects of the Minimum Wage on Prices." Journal of Economic Surveys 22.1 (2008): 187-212. Web. Nov. 2013.

Michl, Thomas R. "Can Rescheduling Explain the New Jersey Minimum Wage Studies?" Eastern Economic Journal 26.3 (2008): 265-277. Web. Nov. 2013.

National Employment Law Project. Big Business, Corporate Profits, and the Minimum Wage. July. 2012. Web. Nov. 2013

Neumark, David and William Wascher. Minimum Wages. Cambridge, MA: The MIT Press, 2008. Web. Nov. 2013.

Schmitt, John. “Why Does the Minimum Wage Have No Discernible Effect on Employment.” Center for Economic and Policy Research. Feb. 2013. Web. Nov. 2013

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Wilson, Mark. Downsizing Government: The Negative Effect of Minimum Wage Law. Cato Institute, 2013. Web. Nov. 2013

Wolfson, Paul and Dale Belman. “What Does the Minimum Wage Do?” Upjohn Institute for Employment Research. 2013. Web. Nov. 2013