The minimum wage is a topic widely debated by both sides of the political spectrum in the United States. But first, what exactly is the minimum wage? Fair Labor Standards Act (FLSA) of 1938 enacted by President Franklin Roosevelt established the minimum wage. The original minimum wage was 25 cents per hour. This amount equates to approximately $4.04 spending ability (Wilson, 2012). Minimum wage is a timely issue, so as an economics student, I would like to discuss my position on minimum wage. The minimum wage should not be increased because there are many negative effects correlated with it including an increase in automation, a rise in prices of goods, an increase in unemployment.
An increase in the minimum wage will result in an increase in automation. The author of ‘The Unintended Consequences of Raising Minimum Wage to $15’ expresses that “Large corporations with big budgets will weigh the increased labor costs and elect to invest in technology to displace workers. This trend will soon become prevalent in the foodservice industry, hospitality, retail, construction and manufacturing” (Kelly, 2019). To further explain this, I will use an example from changes I saw in businesses to support Jack Kelly’s argument. Employers like Walmart are already using technology to reduce the number of employees in their organization. Many Walmart has renovated its stores and initiated self-out registers. Each one of those registers in use was once someone’s job. Seeing that Walmart has currently used this practice which already lowered the number of workers it hires, then automation will be used even more widely when the minimum wage rises. Raising the minimum wage means that firms like Walmart will be switching to cheaper alternatives that can accomplish the same task as an employee to minimize its cost; in this case, they will be more inclined to acquire more self-checkout to put to use. According to the author of ‘Minimum Wage Fallacy’, “With the advances in technology, a lot of these tasks which were earlier performed exclusively by humans are now being performed by machines. Hence, human laborers are not only facing competition from humans, but they are also facing competition from machines” (Juneja). Let’s say that there is a higher fix cost of obtaining the machine at first, but in the long run, it will be cheaper and more efficient. The reason for that is because technology does not require sick leave, take no vacation, does not require maternal or paternal leave nor any fringe benefits, it only requires regular maintenance. Human are not machines, we cannot do manual labor without resting like machines, therefore, it is more likely that employers will favor automation. Employers who switch to automation will not have to spend extra money than they have to. The goal of any business is to maximize profit. So, if options are available, businesses will always decide to go with the most cost-effective choice. Of course, machines cannot replace all human labor, but manual labor done by human can easily be replaced at lower costs.
Moreover, there will be an increase in the prices of consumer goods with a raise in the minimum wage. When a business must pay a higher wage for its employees, they will have to find resources to pay their employees which equates to pricing goods at higher prices. On the other hand, Bobby Scott, U.S. Representative argues that “Raising the federal minimum wage will also stimulate consumer spending” (Scott). This politician is saying that when people have more money, they will spend more which boosts the economy. However, according to Mark Wilson, former deputy assistant secretary of the U.S. Department of Labor and current heads Applied Economic Strategies, LLC, “If a minimum wage is partly or fully passed through to consumers in the form of higher prices, it will hurt the poor because they disproportionately suffer from price inflation” (Wilson, 2012). Assuming that consumers gain more money from the minimum wage raise, but then the product costs more.
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As an illustration, imagine a raise in the minimum wage from $7.25 to $15. This is a 106.90% increase in the federal minimum wage. The government’s Federal Reserve printing out more money will be disastrous. Just imagine the hyperinflation of Germany post World War II, there was too much money flowing around causing German’s purchasing power to drop. There is no way that our government will just print money to subside employers to pay for employees. Now that the thought of business receiving subsidies is out of the way, the cost will fall on consumers. Wilson also revealed that “A 2011 study of quick-service restaurants found that two-thirds of the minimum wage cost increases were offset by higher menu prices and that higher prices rather than cuts in employment and hours were the most important channel of adjustment” (Wilson, 2012). Employers must raise prices to cover their expenses, this will lead to consumers paying higher prices to each product it purchases. For instance, McDonald workers earn an average of $9.93 an hour. When the wage of its employees increases to $15 (same as 51.06%), then it is likely that your $3.99 Big Mac will not have the same price anymore. Hypothetically, if this happens, then a 51.06% increase of the employees’ wages might cause maybe a 25% increase in the price of food (assume that McDonald did not reduce the cost of production by using inferior products, and customers receive the same product quality). A 25% increase in price is the equivalent of a 0.80 cent increase in the price of the Big Mac. Consumers will be paying roughly $4.79 for something that once cost $3.99. Hence, it is not better for consumers when they have lower purchasing power.
Furthermore, the increase in minimum wage leads will also increase unemployment due to less demand for workers. From Econ 380 lectures, “the total number of workers hired by all firm equals the equilibrium employment level”. Consequently, an increase in the minimum wage will encourage more people to enter the labor force; this will expand the labor supply. Because there will be more people in the labor market, competition for the same job will be more rigorous because the supply is higher than demand (unbalance supply and demand), resulting in a higher unemployment rate. Wilson shares that “85% of the most credible studies point to negative employment effects, and the studies that focused on the least-skilled groups most likely to be adversely affected by minimum wages, the evidence for unemployment effects were especially strong” (Wilson, 2012). This point shows that there will be more competition among people, and the lower-skilled workers might be hurt because higher-skilled people have more to offer to employers.
Developing does not have strict minimum wage law as in developed countries. Therefore, it is cheaper for companies to move production overseas (Juneja). If businesses move factories outside of the U.S., then it will be even worse for employees because not only lack of job availability, they also lose jobs to foreigners. This means that there will be an increase in the unemployment rate as the employers would rather hire cheaper workers from other nations, potentially causing more human exploitation for non-U.S. workers. Besides, this scenario portrays, that businesses will always prefer to minimize the cost of production by picking the cheaper route. If the minimum wage raise is implemented, laws that limit business moving overseas are needed, because if not, considering the limited job openings, the ones that lose their jobs are U.S. minimum wage workers.
Conclusively, many factors should be considered when it comes to deciding whether to raise the minimum wage or not. Take into account the idea that technology is more available than ever causing employers to favor using automation than human, increase in the price of consumer goods lowering spending power, as well rise in unemployment, it is reasonable to believe that minimum wage should be unchanged.