Evening everybody and welcome to in the news. Glad you can be with us tonight. I’d like to talk today about a debate that has sprung up in Washington over the last couple of weeks. You may or may not have heard about it. It’s not making big news but it’s a debate that I find quite interesting nonetheless. And that is the debate surrounding the national minimum wage.
A few weeks ago Jesse Jackson Jr. who is a Congressman from Illinois, and is the son of the Reverend Jesse Jackson, introduced a bill that would immediately raise the national minimum wage to $10 an hour. It’s currently at $7.25 an hour. He argues that raising the minimum wage would bolster the economy by increasing the buying power of millions of lower class Americans. He argues that it would be one of the most effective ways of breathing life into our stagnant economy.
The debate around the minimum wage in general has been going on for years, if not decades. Supporters say increasing the minimum wage would be one of the best ways to stimulate an economy because it increases the disposable incomes of those Americans who are most likely to spend it: lower-wage and lower-income Americans.
Critics say that increasing the minimum wage would have a negative effect on the economy right now. They argue that increasing costs for businesses, and especially small businesses, at a time of such serious economic difficulty would have a disastrous effect. They argue that in the end, raising the minimum wage would have the opposite desired effect. It would actually cost people jobs and drag our economy down further.
Which side is right? Well, that’s what I found most interesting about this debate. There seems to be a not a little bit of disagreement between economists on this issue. It was a long held belief that the minimum wage actually hurts employment. That it actually drives unemployment up because it forces employers to cut back on labor costs. But in recent years several studies have challenged that notion. The minimum wage was created way back in 1938 when the US was struggling to come out of the Great Depression. It was part of the Fair Labor Standards Act which also established the pay rate of time and half for overtime pay, and put in place rules against child labor.
It was put in place to combat what Congress called labor conditions that were detrimental to the maintenance of the minimum standards of living. It was set at $.25 back in 1938. The most recent increase was in 2007 when it was raised to $7.25. Eighteen states have minimum wages that are higher than this. With the highest being Washington State at $9.04.
Supporters of an increase contend that the current level, $7.25 is far too low to be a livable wage for anyone living or working in the US. They argue that anyone trying to get by on that level of income will find it very difficult, and anyone trying to support a family on that level of income will find it virtually impossible. They contend that the minimum wage needs not just to be a minimum wage but a livable wage. A wage where workers can afford the basic necessities of life: food, housing, medical care etc. And they think the Federal Government is just the body to help them achieve that. Jesse Jackson jr, the author of the bill is quoted as saying, “we’ve bailed out banks, we’ve bailed out corporations, now it’s time to bail out working people who work hard every day.”
Interesting note, the minimum wage had its highest level of purchasing power in 1968 when it was $1.60. That’s when the minimum wage could buy you the most goods or services for that amount. Proponents cite the fact that if the minimum wage had kept up with inflation since that point it would be it would be at about $10 an hour today.
Opponents have many arguments against the increase. They say that a raise in the minimum wage actually has the opposite desired effect. They say that rather than helping low income workers, increases in the minimum wage actually wind up hurting low income workers. They contend that increases in the minimum wage actually increases unemployment among low productivity and less skilled workers. Because it becomes less attractive to businesses to employ these types of workers, they tend to become more and more excluded from the workforce.
Others contend that raising costs for businesses will force them to transfer those costs to other areas. If a business has to increase its costs, then it will either try to trim down on those costs by reducing its workforce, or it will be forced to pass on those costs to the consumers by raising prices for their goods. Some make the rather obvious point that if increasing the minimum wage helped the economy, then why stop at $10 an hour? Why not increase it to $20/hour? Or even a $100 an hour?
Many economists also point out that raising the minimum wage is not as beneficial as people would think to reducing poverty. They cite the fact that many minimum wage workers are actually teenagers who are part of families who are not in poverty. So the targeted demographic actually doesn’t wind up benefiting all that much.
There have been a lot of studies conducted by economists over the years on the effect of the minimum wage. Generally there has been a slightly more consensus than not that the minimum wage hurts employment. But in 1992 two economists, David Card and Alan Krueger conducted an experiment in which they analyzed restaurants in neighboring towns, but different states. One town, in New Jersey had recently increased its minimum wage, while the other town across the border in Pennsylvania kept theirs the same.
Card and Krueger found that raising the minimum wage had actually increased employment in the New Jersey restaurants. This caused a bit of a controversy in economic circles. Many critics argued that the research was flawed. That the sample size was not large enough or varied enough. But Card and Kruerger stand by their work. There have been other studies on the topic as well in recent years. Most recently a team of economists from Berkeley conducted a study on the effects of the minimum wage. They found that while there weren’t positive effects of raising the minimum wage, there also weren’t any negative effects. That unemployment didn’t rise because of a rise in the minimum wage as many had expected. We have links to both studies on our page and we urge you to take a look at them.
As for the Presidential Candidates, President Obama has not yet stated whether he supports an increase in the minimum wage. But back in 2008 when he was still a Senator, Barack Obama supported raising the minimum wage to $9.50 by 2011. The Republican nominee, Governor Mitt Romney, stated that he sees no reason to raise the minimum wage at this time. Both President Obama and Governor Romney support pegging the minimum wage to the Consumer Price Index. Pegging the minimum wage to the Consumer Price Index basically means that the minimum wage would automatically rise to keep pace with inflation.
Many people in government also believe that the best way to help decrease poverty is not by using the minimum wage, but by using the Earned Income Tax Credit. The Earned Income Tax Credit is a refundable tax credit for low and middle income individuals and families. When you owe less in taxes than the amount of the credit, the result is a refund to the taxpayer for the difference. Many believe that while increasing the minimum wage has questionable benefits at best, and may in fact harm small businesses at worst, the Earned Income Tax Credit is focused and very effective at helping to decrease poverty.
I for one am not sure what to believe on this issue. Part of me believes that giving more disposable income to the very people who are most likely to spend it can be effective. I read once that economists believe one of the most effective forms of “stimulus” for an economy is unemployment benefits. The reason being, people who are unemployed and who need to spend this money on necessities of life such as food, clothing and rent for themselves and their families will be most likely to spend it. These benefits will have the highest rate of circulation within an economy and will therefore be the most effective for the economy as a whole.
It would stand to reason that raising the minimum wage would have the same effect. Workers who make minimum wage and who are adults, are struggling to make ends meet and to pay bills. It’s likely that any increase in their wages will also find its way back into the economy giving the overall market a boost.
On the other hand I think it’s rather intuitive that raising costs on businesses is not the smartest course of action in a weak economy. Most small businesses are struggling to cope with expenses they already have. Rising costs and tough competition are squeezing small business owners. The last thing we would need is a policy that squeezes them further. Especially an expense that could have an adverse effect on employment. That could be a drag on the entire economy.
What do you guys think of this debate? Do you think this would be a good idea, or do you think it’s an initiative that has good intentions but will wind up causing more harm than good? I’d love to hear what you think. Drop us a line and let us know. Include your name and town and we’ll read some of your comments on the air.
Well, that’s our show for this evening, hope you enjoyed it. And glad you could be with us. Don’t forget to visit our page at blogtalkradio.com/inthenews for upcoming dates and shows. And remember that you can also follow us on twitter now at twitter.com/inthenews1. That’s twitter.com/inthenews the number 1. See you next time everybody. Good night.