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Minimum Wage and Economic Growth

In: Business and Management

Submitted By roosh9292
Words 1963
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Ayman Lam
June 11, 2014
Dr. De

Term Paper: Minimum Wage and Economic Growth Economic Policy Institute, most commonly known as EPI, has always been a crucial factor in the effort to increase minimum wage and highlighting its positive effects for blue-collar families as well as the general economy. As of today, twenty-one states including Washington, D.C. have already advanced in setting their minimum wage above the federal minimum of $7.25; in other words, almost half of the United States workforce is now under the influences of minimum wages above the federal minimum. Therefore, EPI took the opportunity to conduct data and reports from these states, with the aid of the Economic Analysis and Research Network, also known as EARN, in order to advance economic policy at both state and regional levels, and at the same time, demonstrating the insufficiency of having $7.25 as the minimum wage. President Barack Obama, during his State of the Union, requested for a raise in minimum wage. In the late 1960’s, the purchasing power of the minimum wage was at $9.22 an hour in 2012 dollars, which is nearly two dollars above the current level of $7.25 an hour. Inflation is a cause of reducing the purchasing power of the dollar; so as a result, when the minimum wage is raised, the purchasing power of the eventual wage is less than the proposed nominal dollar value. The minimum wage is twenty-three percent less than its peak inflation adjusted value of 1968. One of the reasons that many support the increase of the wage is the fact that the current low-wage workforce is far more educated than the low-wage workforce in the 1960’s. In 1968, forty-eight percent of low-wage workers had a high school degree while in 2012, seventy-nine percent had a high school degree. Respectively, in 1968, approximately seventeen percent of the low-wage workers had college experience, compared to the forty-six percent in 2012. The central point here is that minimum wage in 2013 is much lower than it was in 1968, comparatively, despite the workers receiving much more education. EPI released an analysis of the Fair Minimum Wage Act of 2013, announced by Senator Tom Harkin and Rep. George Miller, that engaged to raise the federal minimum in three stages of $0.95 from its current level of $7.25 per hour to $10.10 per hour. Since that Fair Minimum Wage Act has been released, minimum wages have increased at state levels. The goal of the EPI by raising the federal minimum wage to $10.10 by 2016 is to increase the incomes of millions of working families in order to enhance the Gross Domestic Product (GDP) of the U.S. With the Harkin-Miller proposal, raising the wage would return the federal minimum wage to approximately the same inflation-adjusted value in the 1960’s. Also, the GDP would grow by about $22 billion, which would supposedly create 85,000 new jobs. Inflation gradually destroys its real value every year that the federal minimum wage becomes stagnant in nominal dollars, which simply means that workers relying on that minimum wage are not capable of purchasing as much as they are used to in the previous years. This kind of pattern could become a tremendous threat to low-income families because basic necessities could be something difficult for them to afford. Currently, with the federal minimum wage held at $7.25, a parent who is a full time worker is not able to reel in enough income to cross above the federal poverty line. Taking a quick look at the 1960’s and 1970’s, a family consisting of two people and working with minimum-wage income could be considered above the poverty line. In the late 1960’s, at one point, a minimum-wage income family of three made enough to make it above the poverty line, but still fell short of the poverty line for a family of four.
Within the past forty-five years, the U.S. economy has continued to develop and grow, with productivity nearly doubling itself, meaning the capacity to produce goods and services increased given the same amount of work, due to technological advances, higher education, etc. Nevertheless, the federal minimum wage has managed to remain standing still. The growth of U.S. productivity has advanced at a much higher rate than that of both the real U.S. average wages and real minimum wage.
The increase of the minimum wage to $10.10 per hour directly and indirectly affects different groups of workers, most of whom, contrary to popular belief, are not part-time working teenagers (who usually obtain jobs as a means of earning extra spending money, rather than supporting a family). With the proposed incremental increases over the next few years, the figure below displays the number of workers who would be both directly and indirectly affected.

The first increase of $0.95 to $8.20 per hour would directly affect approximately 7.0 million workers (those who are earning between $7.25 and $8.20 per hour). Then about 2.7 million are indirectly affected by the increase (those who are earning barely above $8.20 per hour); these employees, although not working at minimum wage, are most likely receiving a raise, creating a higher yearly income. As the proposed plan continues into 2015, the federal minimum wage is increased another $0.95, which results into $9.15 per hour. With this raise, around 11.1 million workers will be directly affected, while leaving 6.5 million indirectly affected. In the final year of the proposed plan, the minimum wage would increase to $10.10 by 2016, where 16.7 million workers would be directly affected and 11.1 million indirectly affected, causing a total of about 27.8 million U.S. workers seeing some sort of pay increase. The gender distribution of workers directly affected by increasing the minimum wage to $10.10 is slightly dominated by women. As of 2013, females make up 49.2 percent of total employment (a pretty even distribution). However, as shown in the figure above, where a total of 27.8 million would be witnessing a pay increase by 2016, about 55.0 percent of that specific population would be compromised of women. Of course, the number is varied from state to state; about 64 percent in Mississippi all the way down to 48 percent in California. The most usual misconception about the low-wage workforce is that it is essentially made up of teenagers and the young population; when in fact, teens account for only a tiny portion of low-wage workers. If the increase of the minimum wage to $10.10 were to be enforced by 2016, only about thirteen percent of those affected by the change would fall into the “teenager” category. To paint a better picture of the demographics that are affected, there are more low-wage workers above the age of fifty-five than there are teenagers. The average age of workers that are affected is thirty-five years old, where more than half are at least thirty, and about thirty-five percent are at least forty years old. This action would also affect a large array of families who fall into the grouping of low to middle-income levels. Using the Current Population Survey Outgoing Rotation Group micro data, about 23 percent of have family incomes less than $20,000, 28.8 percent fall between $20,000 and $39,999, and 17.0 percent make between $40,000 and $59,999. With the use of the American Community Survey, the 2012 median family income was $62,527, meaning that almost 70 percent of affected family incomes fall into the bottom half of the income distribution.
It’s a proven pattern and common sense to believe that typically, low-wage workers tend to spend their additional earnings in order to acquire their basic necessities. On the other side, high-income families are capable of using any additional earnings as a means of saving. Increasing the minimum wage can offer a decent lift to overall economy for this very reason: it would give low-wage income workers the ability to immediately spend their money. The Federal Reserve Bank of Chicago conducted a research that with the raising of the wage to $10.10 could increase the U.S. GDP by at least 0.3 percent. The research also showed that it would stipulate a supplementary thirty-five billion dollars in wages and produce a net increase of $22.1 billion in economic activity, which would lead to increased consumer spending, which in turn would enhance the U.S. GDP; this was concluded even with the consideration of increased labor cost and price increases for consumers. With the GDP increasing, 85,000 new jobs could be created.
Of course with every story there’s two sides; some believe that raising the minimum wage would have negative effects on the economy. An example that was used to showcase the negative effects was this: if a teenager were to apply for his first job, his skills would be little to none. With that in mind and the minimum wage set at $7.25, he or she would be hired if they are capable to produce at a rate higher than $7.25 per hour. However, once the minimum is raised to $8.20 per hour, that teenager will not employed, but rather someone else with a productivity rate higher than $8.20 will be hired. There are also benefits that may be decreased in order to counterweight the higher minimum wages. In turn, this could cause a ripple effect in the workforce, forcing participation rates to fall, and even unemployment rates to increase.
Some believe that minimum wages shouldn’t even exist, believing that it inhibits the right of contract. Consider an unemployed individual looking for a job and is willing to work for $5 per hour, more people will have the opportunity to keep their jobs and employment. Where instead if the minimum wage is set at $7.25 per hour, that employee wouldn’t receive any income, and therefore, becomes unemployed. That individual will be worse off; this acts as a domino effect and taxpayers receive the “bad end” of it as well because they would have to pay for the upkeep.
Nevertheless the negative effects, specific groups of people will continue to support the raise in minimum wage. As of today, twenty-one states including the District of Columbia have already progressed in placing their minimum wage above the federal minimum of $7.25 per hour. As more and more states begin to adopt the proposed Harkin-Miller plan, we come to this conclusion: increasing the minimum wage to $10.10 by 2016 would elevate the earnings of millions of low to moderate-income working families, which in turn would heighten their spending power.

Cooper, David. "Raising the Federal Minimum Wage to $10.10 Would Lift Wages for Millions and Provide a Modest Economic Boost." Economic Policy Institute. N.p., 19 Dec. 2013. Web. 11 June 2014. <>.
Shierholz, Heidi. "Increasing the Minimum Wage to $10.10 Will Make Low-Wage Workers and Their Families Better Off." Economic Policy Institute. N.p., 14 Feb. 2014. Web. 13 June 2014. <>.
Tennant11, Michael. "Minimum Wage: The Ups & Downs." Minimum Wage: The Ups & Downs. N.p., 11 June 2014. Web. 12 June 2014. <>.

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