The Facts about the Rejected Minimum Wage Increase

The Facts about the Rejected Minimum Wage Increase

Most Americans know that an increase in the federal minimum wage was recently proposed. This bill, proposed by a democratic senator from Iowa named Tom Harkin, outlines a plan to hike the minimum wage from the current hourly wage of $7.25 to $10.10. If this seems like a large increase, it is (39.3% increase), but there are a few factors that make this change more manageable for firms and smaller than it appears in actuality. I must include a piece of information that bears some importance before I talk about how this bill would be a good idea though: it was voted on today by the Senate and rejected on a 54-42 test vote (60 was the magic number needed to pass). This shows the inefficiency of our Congress, however that is another topic that I will not focus on in this post.

First of all, the higher wage of $10.10 will not be realized until 2016. The plan is to gradually raise the minimum wage over the next three years, at a rate of $0.95 per year. This strategy will allow firms to better adjust to the fact that labor is now more expensive as opposed to one massive increase. So, instead of a 39.3% change from $7.25 to $10.10 at first, it will be a 13.1% rise increase. This is still substantial, but it is offset by a few other factors.

Another economic principle that lessens the impact of this minimum wage hike is inflation. Inflation has been at about 2% for a while now in the US, so it is safe to assume it will be around that number for the foreseeable future. An inflation rate of 2% is not that high, but it still offsets the increase in the cost of labor by a little bit. An additional piece about inflation is that in order to help the poor (those making minimum wage), the sooner this minimum wage increase is passed by Congress the better, because the $10.10 is a nominal number which at 2% inflation will go down in value in real terms as time passes.

It is extremely important to remember that this increase is at the federal level, which means states cannot undercut the number, but they can go over it. Currently, 21 of the 50 states have minimum wage levels above the federal amount of $7.25, and Washington is the highest with a whopping minimum wage of $9.32 per hour. This means that the first two $0.95 increases will not even affect the state of Washington. So it is not like everybody will be affected drastically by this process; employers in many states are already used to paying higher minimum wages.

The critics of this proposal argue that raising the minimum wage increases unemployment. This is of course true; a simple supply and demand model of the labor market will tell this to the typical college freshman taking a principles course. However, recent economic data has suggested that the effects on unemployment when raising the minimum wage are not that significant. This proposal would push some people out of a job, but it would give a greater proportion of people more money to go out and consume and help the economy as well as their own utility.

The benefits of increasing the minimum wage greatly outweigh the costs, and when taking into consideration all of the factors which reduce the initial impact of the bill on employers, there are very few reasons to reject this bill. The main reason it was rejected, in my opinion, lies in our imperfect political system, not in the economic reasoning behind this proposed increase.


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