Business Tips··6 min read

The Pros And Cons Of Raising The Minimum Wage

Pros And Cons Of Raising The Minimum Wage

The federal minimum wage in the United States is currently $7.25 an hour. It has been at this level for the past 12 years. Meanwhile, the debate over whether it should be increased or not is raging on with no obvious winners.

Those who believe the cons of raising the minimum wage exceed the benefits have as long a list of arguments to support their views as those who believe the pros of raising the minimum wage outweigh the risks.

To help readers get a clearer perspective on the issue we've drawn up a list of both the pros and the cons of increasing the minimum wage. Continue reading to find out more about minimum wage laws and how they affect the economy.

Pros of minimum wage increases

Supporters of a higher minimum wage believe the benefits of raising the minimum wage far outweigh the risks. Here are three of their strongest arguments for raising the salaries of minimum-wage workers.

It boosts economic activity

The point here is that increasing the federal minimum wage would mean putting more cash in the hands of workers. That, in turn, would lead to an increase in household spending and a higher buying power, which would stimulate economic activity.

The core of this argument is that more money in the hands of ordinary people would enable them to purchase more products and services. This would benefit businesses and they would respond to the increased demand by creating more jobs.

As the living wage increases, more low-wage workers will have disposable income to spend. In theory, everyone wins and not just minimum wage employees.

It leads to a higher standard of living

One of the main reasons why the minimum wage should be increased, supporters argue, is to give low-income workers a higher living standard. Someone who earns an hourly minimum wage of $7.50 has a yearly income of only $15,080. That is well below the federal poverty level of $17,420 for a family of two. It's not an adequate standard of living for most people, so they resort to public assistance programs.

Apart from that, inflation has been steadily eating away at what one can buy if you are earning minimum wage. Since 1968, the real purchasing power of the minimum wage has dropped by a whopping 31%. Meanwhile, the minimum wage laws have not changed much and American workers are feeling the effects.

An increase in the minimum wage would help low-income earners access better housing, health care, food, and similar necessities. The cost of living is simply growing at a much higher rate than the hourly wage for full-time workers.

A higher minimum wage would lead to improved productivity

If those who earn a minimum wage were able to afford a better lifestyle, they would most likely be prepared to work harder, i.e. productivity would increase among minimum wage employees and even inexperienced workers.

Minimum wage workers would then also be more content at work, which would reduce the likelihood of no-shows. Plus employee turnover would be reduced, cutting the cost for businesses of training new staff.

With their basic necessities covered, you can expect worker productivity growth in your business. And with job growth and more productivity, they would earn more revenue and achieve a higher annual income for your business.

Cons of raising the minimum wage

As we have seen above, many experts believe that increasing the minimum wage would boost the economy, improve living standards, and raise productivity. There are, however, others who strongly oppose raising the minimum wage, despite the benefits of a higher hourly rate for the poorest workers.

They believe that, while everything might look good on paper, raising the minimum wage would actually cause major problems, with ripple effects throughout the economy. According to them, this is why raising the minimum wage is bad.

Small businesses would be hit particularly hard

Small business owners already find it difficult to compete against large corporations. Most of them have no choice but to operate on small profit margins. This means they would find it very difficult to absorb the cost of an increase in minimum wages in the current economy.

They might be forced to either lay off workers or pass on the cost increase to the consumer. Major corporations with large amounts of capital will find it much easier to deal with such a cost increase as low-wage jobs are not such a burden for them.

For these businesses, minimum wage increases would increase labor costs even more, and finding full-time employees would be impossible.

There would be a rise in unemployment

If the minimum wage were to be raised significantly, it could cause large numbers of already low-income earners to lose their jobs. While this is more likely in the case of people who work for small firms, it can also happen at large corporations. If employers have no option other than to pay their workers more, many of them will reduce their employee numbers in an attempt to keep profit levels untouched.

The reality on the ground is that it would be mostly low-income workers who lose their jobs. While a certain percentage of them will remain employed and enjoy their new higher wages, the rest will lose what for many of them is their only source of income.

The cost of labor would simply be too high for too many employers who have only a minimum wage job to offer.

Tipped workers would run into problems too with their financial situation. They would still be at minimum wage rates, but since they are increased, it will make it more difficult for employers to hire them.

There would be an increase in inflation

If there should be an increase in the federal minimum wage, many organizations could simply increase their prices to keep profit levels untouched. This would result in an increase in the prices of consumer goods and services as the poverty threshold gets higher.

The net effect would be to cancel out the higher purchasing power that workers would get from the pay rise. Inflation would go up, in the process making necessities such as housing, food, and healthcare even more unaffordable for low-income workers.

In short, a higher living wage would not lift the poverty rate. People in poverty may feel some economic growth, but it will be very short-lived. In the long run, the minimum standard will just be moved to a higher bar.

The bottom line

As you will probably realize by now, when it comes to increasing the national minimum wage there are many different angles to consider. While for many low-income workers, it would mean more money in their bank accounts and with that an improved quality of life, there are also various other economic factors playing a role.

The possibility that a higher minimum wage could increase both unemployment and inflation, together with other negative outcomes, causes major uncertainty among economic conservatives. They believe that the cons of raising the minimum wage far outweigh the benefits and argue that the solution, in this case, would be much worse than the problem. Wages, they say, should be determined by the free market and nothing else.

Those who support an increase in minimum wages believe the opposite is true: that any possible negative effects of raising the minimum wage are outweighed by the benefits - and that it's time American legislators do the right thing and improve the living standards of those who work very hard in return for very little.

Whatever your point of view on this issue, there will most likely be major developments on this front over the next few years. The last time federal minimum wages were increased was more than a decade ago, and the movement in support of an increased minimum wage has been gaining significant momentum - particularly since the arrival of a new President in the White House who has this as one of his policy agendas.

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