The Pros and Cons of Raising Minimum Wage

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The minimum wage is the lowest hourly wage an employer pays employees for their services. 

Raising the minimum wage is a significant political issue due to its direct impact on financial situations. 

In this article, we explore the pros and cons of raising the minimum wage, exploring how such changes can impact various sectors of the economy, employment rates, and workers’ living standards. 

The federal minimum wage in the US, established by the Fair Labor Standards Act, is $7.25 per hour. This rate has been constant since 2009. 

This is the lowest hourly wage an employer can pay their employees as mandated by federal law in a country. It acts as a standard nationwide, ensuring that all workers receive at least this minimum amount for their labor. 

While the federal government sets a standard minimum wage, individual states have the power to establish their minimum wages, which can be higher than the federal rate. Employers must pay higher wages when state minimum wages exceed the federal rate.

Related Article: Higher Base Salary Vs. Bonus: Which Is Better And Why?

The purpose of minimum wage is multifaceted and aimed at ensuring economic and social welfare.

Here are some of the key purposes of a minimum wage:

Protects Workers from Exploitation

Minimum wage laws are designed to prevent employers from paying unreasonably low wages, especially in industries where workers have less bargaining power. By setting a legal minimum, these laws ensure that workers receive a wage that is deemed fair and just for their labor.

Ensures a Basic Standard of Living

The minimum wage aims to provide workers with enough income to afford necessities. This concept is based on the principle that anyone who works full time should be able to support themselves and avoid poverty.

Promotes Social Justice

Instituting a minimum wage is often seen as a societal commitment to treating all workers with dignity and fairness. It reflects the value placed on labor and contributes to the overall social welfare of the community.

Encouraging Workforce Participation

A competitive minimum wage makes employment more appealing than unemployment benefits or welfare, encouraging people to seek and retain jobs. This helps individuals and contributes to the overall health of the labor market.

Standardizes Wages

The minimum wage serves as a benchmark in wage negotiations across various sectors. It provides a baseline, ensuring wage uniformity and helping workers across different industries receive fair compensation.

Related Article: How to Negotiate a Higher Hourly Wage

Let’s now explore the pros and cons of raising minimum wages. 

Raising the minimum wage carries several potential advantages for individual workers and the broader economy.

Here are some pros of raising the minimum wage:

Improved Quality of Life for Workers

Raising the minimum wage directly impacts the earnings of low-income workers, enabling them to afford basic needs such as housing, food, and healthcare. This increase in income can lead to an overall improvement in their quality of life and can also contribute to enhanced morale and job satisfaction.

Economic Growth

Higher wages can increase consumer spending, as workers have more disposable income. This boost in consumption can drive demand for goods and services, stimulating production and potentially leading to economic growth. 

This effect is often more pronounced when lower-income earners receive a pay increase, as they are more likely to spend additional earnings than higher-income individuals.

Reduced Income Inequality

Raising the minimum wage can help reduce the gap between the rich and the poor by increasing the earnings of the lowest-paid workers. This redistribution of wealth is not merely a matter of fairness; it addresses the systemic issue where economic gains disproportionately benefit those at the top.

When the earnings of lower-income workers increase, their purchasing power improves, leading to a more equitable distribution of wealth and a healthier overall economy. This approach ensures that the benefits of economic growth are shared more inclusively, contributing to a more balanced and sustainable economic system. 

A higher minimum wage can effectively aid the broader strategy to reduce socioeconomic disparities and foster a more just and equitable society.

Deterrence of Employee Turnover

Higher wages can improve employee retention rates. When workers are compensated with wages, they perceive as fair and just, their likelihood of seeking alternative employment diminishes. 

This reduction in employee turnover is not just a matter of employee contentment; it translates into tangible financial benefits for employers. By offering higher wages, businesses can retain their existing workforce, leading to more experienced, stable, and skilled employees. 

Positive Impact on Public Health

Enhanced financial stability from higher wages plays a pivotal role in alleviating the stress and anxiety often associated with economic insecurity, which can have direct and beneficial effects on mental and physical health.

With greater income, workers have more access to healthcare services, including preventative care, leading to early detection and treatment of health issues. This accessibility to healthcare contributes to a healthier workforce, reducing the incidence of chronic diseases often exacerbated by poverty and lack of medical care. 

Moreover, with increased financial resources, individuals are more inclined to make healthier lifestyle choices, such as better nutrition and regular exercise, further bolstering their overall health. 

Raising the minimum wage, while having potential benefits, also comes with several drawbacks:

Potential Job Losses

To mitigate higher labor costs, some businesses, especially in industries like manufacturing and retail, might turn to automation as an alternative to hiring workers. This can lead to job losses as machines or technology replace human labor.

Small businesses, which often operate with tight budgets, may find it challenging to cope with increased wage bills. This could lead to downsizing or, in extreme cases, businesses closing, resulting in job losses.

Increased Prices of Goods and Services

Businesses may pass the increased labor costs onto consumers through higher prices for goods and services. This can lead to inflationary effects, potentially diminishing the purchasing power of consumers, including those who just received wage increases.

Possible Reduction in Work Hours

Employers may reduce the number of hours employees work to manage the increased costs of higher wages. While workers may earn more per hour, their overall earnings could stagnate or decrease if their hours are significantly cut.

Some employers might reduce the total number of hours they allocate to their employees as a direct response to managing their payroll expenses. This can adversely affect workers who depend on full-time hours, impacting their overall income and benefits.

Proposed alternatives and solutions to raising the minimum wage offer different approaches to addressing low-income challenges while mitigating potential negative economic impacts. Here are proposed alternatives and solutions:

Skills Development Programs

Implementing training and skill development programs is a great alternative to raising the minimum wage. By allowing workers to acquire new skills and qualifications, they become more attractive candidates in the job market. This, in turn, can lead to increased employability, making it easier for them to find higher-paying jobs.

Skill development programs can also help workers progress in their careers. They may be able to qualify for promotions or take on more specialized roles that offer better compensation. As workers become more skilled and gain access to higher-paying job opportunities, there is less reliance on increasing the minimum wage to ensure a living income.

Tax Incentives for Businesses

Tax incentives can incentivize businesses to voluntarily increase wages. By providing businesses with tax credits or deductions for higher wages, the government helps offset the increased labor costs associated with raising wages. This can make it financially feasible for businesses, especially small ones, to pay more to their employees.

Moreover, small businesses often have limited resources but tax incentives can help them compete with larger companies by making it easier to offer competitive wages.

Subsidies for Low-Income Individuals

Direct subsidies or income supplements for low-income individuals provide immediate relief to low-income workers, helping them meet their basic needs, such as housing and food. By supplementing the incomes of low-wage workers, income inequality can be reduced without necessarily imposing additional costs on employers.

These subsidies can act as incentives for individuals to participate in the workforce, as they can increase the overall financial reward of working compared to relying solely on government assistance.

Profit-Sharing Programs

Profit-sharing programs can strengthen the connection between employees and their companies. When employees share in the company’s profits, they are often more motivated to contribute to its success, potentially leading to increased productivity and profitability.

These programs can ensure that employees benefit directly from the company’s financial success, leading to fairer compensation. Employees may like to stay with a company that offers profit-sharing, fosters long-term commitment, and reduces turnover.

Phased Increases

Gradually increasing the minimum wage can be an excellent approach. Phased increases allow businesses to adapt gradually to higher labor costs, reducing the risk of economic shocks, job losses, and significant price inflation.

Sector-Specific and Regional Minimum Wage Variations

Higher minimum wages in high-cost-of-living areas ensure that workers can meet their basic needs, while lower minimum wages in lower-cost areas prevent businesses from being disproportionately burdened.

Sector-specific variations ensure that businesses remain economically viable while still providing fair wages. In addition, regional variations consider the unique economic circumstances of different areas, ensuring that minimum wage policies are relevant and effective in addressing local challenges.