Right now Washington is playing host to the annual gathering of US Governors. One of the foremost issues being discussed at this gathering is whether or not the federal minimum wage should be increased to match President Obama’s stated goal of $10.10 an hour. As it stands right now the current federal rate is $7.25 an hour. The federal minimum wage is applicable to all states and territories but there are exceptions. Certain jobs are not subject to wage requirements and certain employment conditions such as the number of employees, the total amount of annual profit and whether or not a business engages in interstate commerce also dictate whether or not wage requirements apply. As it stands right now 22 states (AK, WA, OR, CA, NV, MT, AZ, NM, CO, MO, IL, MI, OH, FL, NY, VT, ME, MA, CT, RI, NJ, DC) currently have minimum wage levels set above the federal standard (including Washington DC), 20 (ID, UT, ND, SD, NE, KS, OK, TX, WI, IA, IN, KY, HI, NH, PA, DE, MD, WV, VA, NC) have wage levels set at the federal level and 9 (WY, MN, AR, TN, LA, MS, AL, GA, SC) have no wage requirement or a wage level set below the federal standard for jobs that do not require a minimum wage.
There has been a lot of debate on this subject for a number of years. On one side of the debate people (typically progressives and liberals) argue that the federal level should be set higher than the current federal level. Their reasoning is that putting more money into the hands of workers increases the amount of money they spend thereby stirring the economy and increasing the overall level of wealth.
On the other side people (typically conservatives) argue that increasing the required wage only serves to increase operating costs for businesses which results in their compensating for the increased costs by slashing jobs and work hours. They believe that increasing the minimum wage actually increases unemployment and harms the economy.
There are problems with both arguments. The biggest problem with the liberal/progressive argument lies in the most simple of economic principles, supply and demand. When a product becomes cheaper demand for that product increases; for instance when the hottest new cell phone or gaming console goes on sale at a reduced price people line up around the block to buy one. When a product increases in price demand for that product drops; for instance when the price of a new cell phone gets too high people stop buying them. It works the same way with labor; labor is in fact a commodity. When the cost of labor is cheap the demand for labor increases, and when the cost of labor increases the demand for labor decreases. This is most readily seen in the number of manufacturing jobs that have been sent overseas due to reduced labor costs. If the minimum wage is increased that means the cost of labor will increase and the laws of economics tell us that the demand for labor will then decrease.
This can actually be measured, at least somewhat by examining and comparing minimum wage rates to unemployment rates. The average unemployment rate for the 9 states with no minimum wage or wages set below the federal limit is 6.44%. The average unemployment rate for the 20 states with wages set at the federal level is 5.4%. The unemployment rate for the 22 states with wages level set above the federal level is 7.05%. The states with the highest minimum wage have higher levels of unemployment, on average. The bar for the top twenty lowest unemployment rates is currently set at 6.1%, anything under this number qualifies for the top twenty lowest unemployment rates. Of the 9 states with less/no wage level 4 are below 6.1%. Of the 20 states set at the federal level 14 are below 6.1% and two more are at 6.2%. Of the 22 states with minimum wage set above the federal level only 3 are below 6.1% and 3 more are at 6.2%. The top six states with the highest levels of unemployment (RI, NV, IL, MI, CA, DC) all have minimum wage levels above the federal level. While this does not prove definitively that increasing minimum wage increases unemployment these numbers do support that argument. In fact one could argue that this is proof that the application of supply and demand to labor is valid. In states where labor is cheaper unemployment is lower because the demand for labor is higher. In states where labor is more expensive unemployment is higher because the demand for labor is reduced.
The second major flaw with the progressive/liberal argument is that increasing the amount of money people have to spend does not necessarily increase their ability to spend it. One of the biggest drives of inflation is the level of wealth in a given area. If the level of wealth in a region increases the price of goods will then Increase as well because sellers know the people can afford to pay the increased prices. So if the minimum wage is increased it will only serve to increase inflation and the increased cost of goods will offset any monetary gains made by the working class.
The biggest flaw with the conservative argument is really one of worker rights. By removing the minimum and allowing the market to dictate wages there is a possibility that wages for unskilled laborers could decrease significantly thereby harming those workers and their families. No one wants to see workers being exploited and paid next to nothing for their efforts. The flip side of this is that the low wages available to unskilled laborers could drive more people into colleges and trade schools to avoid low paying jobs. Another possible benefit of removing the minimum wage could be the slowing or reversal of inflation. If people have less money to spend sellers will be forced to reduce the cost of their goods in order to remain in business. Once upon a time, not so long ago making $10-15,000 a year was considered to be a pretty good living. Deflation could bring us back to those times.
There is a third side to this argument; that being that states should not be allowed to set their own minimum wage levels thereby creating a uniform wage level across the country. The argument here is that if every state has the same minimum wage level there would be no incentive for businesses and workers to move thus creating wage/employment imbalances. This argument has flaws as well. Employers will always try to reduce operating costs as much as possible; this could mean shipping more jobs overseas, reducing the number of employees to the absolute minimum necessary or even replacing workers with machines and computers where possible.
To anyone with even a basic understanding of economics increasing the federal minimum wage seems like a bad idea. The law of supply and demand has been tested over several thousand years and has always held true. Increasing cost leads to a decrease in demand, this is unavoidable. The only possible way to get around this would be to enact a series of draconian laws dictating wages, prices, material costs and sources of labor. At that point the United States of America ceases to be and instead becomes the Soviet States of America.