How does the minimum wage affect the Fed’s biggest fear? I touched on this subject previously as the Fed began its rate-hiking campaign. However, while the issue of the “millions of people” who aren’t paid a “living wage” for work makes headlines, the actual numbers are pretty underwhelming.
As of the end of 2021, there are 2 million workers at, or below, minimum wage. Crucially, this number includes those in the restaurant profession that are paid “wages” of $2/hour but also receive tips. Notably, the number and total percentage of ALL workers today at or below minimum wage are at the lowest levels since 1979.
Where Are They?
Unsurprisingly, you will find the majority of minimum wage earners in fast-food, transportation, and personal care occupations.
As the Bureau of Labor Statistics notes:
Minimum-wage workers tend to be young. Although workers under age 25 represented nearly one-fifth of hourly paid workers, they made up 44 percent of those paid the federal minimum wage or less.
The Federal Minimum wage is a political “hot potato” that garners attention but has little impact on the economy’s overall health.
“So what? People working at restaurants need to make a ‘living wage.'”
While it is an emotionally charged argument, the minimum wage is not meant to be a living standard.
Minimum wage jobs are starter positions to allow businesses to train, evaluate, and grow valuable employees.
- If the employee performs, wages increase along with additional duties.
- If not, they either remain where they are or get replaced.
Critically, minimum wage jobs were not meant to be permanent or “living wage.”
If an individual remains stuck at the minimum wage, it may have more to do with the worker than the employer. According to a recent survey of 1344 managers by ResumeBuilder.com, GenZ, the group most likely found working at minimum wage, is “the” most challenging generation to work with.
- 49% say it’s difficult to work with GenZ all or most of the time
- The top reasons they feel GenZ is difficult to work with are the lack of technological skills, effort, and motivation.
- 65% say they more commonly need to fire GenZers than employees of other generations
- 12% have fired a GenZer less than one week after their start date
- Being too easily offended is a top reason GenZers get fired.
Nonetheless, there is a misplaced outcry for hiking the minimum wage to $15 an hour, or in California’s case, $22. The problem, of course, is the economic impact on those receiving those pay increases.
As is always the case, there is “no free lunch.”
No Free Lunch
Okay, let’s hike the minimum wage to $15/hr. That doesn’t sound like that big of a deal.
However, assume the employee works full-time, earning $15/hour.
- $15/hr X 40 hours per week = $600/week
- $600/week x 4.3 weeks in a month = $2,580/month
- $2580/month x 12 months = $30,960/year.
Given that most are in the fast-food industry, what happens to the price of hamburgers when companies must pay $30,000 annually for “hamburger flippers?”
McDonald’s and Walmart can give you a clue.
“KeKe Mendez recorded herself driving to a McDonald’s drive-thru. When she approached the window, there wasn’t an employee in sight. Instead, she was met with an automated machine handling her order. The machine placed the bag down and pushed it on a conveyor belt to the window.“
After Walmart and Target announced higher minimum wages, layoffs occurred, and cashiers got replaced with self-checkout counters. Restaurants added surcharges to help cover the costs of higher wages, a “tax” on consumers, and chains like McDonald’s and Panera Bread replaced cashiers with apps and ordering kiosks.
Such should not be surprising as labor costs are the highest expense to any business. It’s not just the actual wages but also payroll taxes, benefits, paid vacation, healthcare, etc. Employees are not cheap; that cost must be covered by the goods or services sold. Therefore, if the consumer refuses to pay more, the costs must become offset elsewhere.
More importantly, just as we found out with sending stimulus payments to households, the service cost will increase once businesses realize more money is available. As noted by the Heritage Foundation, the impact of a $15 Federal minimum wage would increase childcare costs by $2000 to $6000 depending on the state.
In other words, there is “no free lunch,” as increasing the minimum wage will lead to an increase (inflation) in everything else, essentially wiping out the benefit of the wage increase.
However, there is more to hiking the minimum wage than just increased costs. It has the potential to exacerbate the Fed’s biggest fear.
The Wage Spiral
How can hiking the minimum wage foster a wage spiral?
Let’s look at an example parcel carrier job that currently pays $15/hour and has the following work requirements.
- Lifting boxes up to 150 lbs.
- Loading and unloading trucks in a warehouse that can be freezing or sweltering,
- Driving a large truck anywhere from 10-150 miles a day,
- Customer interaction,
- Route planning.
What would be the consequences of raising the minimum wage to $15/hour for this worker?
There are two possible outcomes.
- Instead of lifting parcels of up to 150 lbs per day, they quit for a much easier job for the same pay; or
- Demands a pay raise (which, if they don’t get the raise, they quit to take a much easier job.)
The parcel carrier service acquiesces and raises them to $20/hour. However, now the managers making $20/hour want a raise, and so forth. It is the same effect as throwing a rock into a pond. Yes, the rock (in this case, the number of minimum-wage workers) may be small, but the “ripple effect” to the pond’s edges becomes substantial.
As wages increase at the bottom, there is a trickle-up effect on all workers. Importantly, those accelerating wage costs ultimately must pass on to consumers, otherwise known as inflation. That cycle of rising wages and prices is the “wage-price spiral.” The Fed already got a taste of the problem with the influx of stimulus into the economy, which led to surging demand when employees were scarce.
Such is also why the Federal Reserve remains committed to keeping interest rates elevated to slow economic demand (which, in turn, will lower wages as unemployment increases) to reduce inflationary pressures.
The Consequences
The consequences of mandated minimum wage increases are problematic due to the impact such can have on overall wages, costs, and corporate responses. The Manhattan Institute previously concluded:
“By eliminating jobs and/or reducing employment growth, economists have long understood that adoption of a higher minimum wage can harm the very poor who are intended to be helped. Nonetheless, a political drumbeat of proposals—including from the White House—now calls for an increase in the $7.25 minimum wage to levels as high as $15 per hour.
But this groundbreaking paper by Douglas Holtz-Eakin, president of the American Action Forum and former director of the Congressional Budget Office, and Ben Gitis, director of labormarket policy at the American Action Forum, comes to a strikingly different conclusion: not only would overall employment growth be lower as a result of a higher minimum wage, but much of the increase in income that would result for those fortunate enough to have jobs would go to relatively higher-income households—not to those households in poverty in whose name the campaign for a higher minimum wage is being waged.”
Such is just common sense logic, but it also finds support from the CBO report.
- Reductions in employment would initially be concentrated at firms where higher prices quickly reduce sales. Over a longer period, however, more firms would replace low-wage workers with higher-wage workers, machines, and other substitutes.
- A higher minimum wage shifts income from higher-wage consumers and business owners to low-wage workers. Because low-wage workers tend to spend a larger fraction of their earnings, some firms see increased demand for their goods and services, which boosts the employment of low-wage workers and higher-wage workers alike.
- A decrease in low-wage workers reduces the productivity of machines, buildings, and other capital goods. Although some businesses use more capital goods if labor is more expensive, that reduced productivity discourages other businesses from constructing new buildings and buying new machines. That reduction in capital reduces low-wage workers’ productivity, which leads to further reductions in their employment.
The critical point here is that the unintended consequences of a minimum wage hike in a weak economic environment are not inconsequential. Given that businesses will fight to maintain profitability, hiking the minimum wage, given the subsequent “trickle-up” effect, will lead to further automation and the “off-shoring” of jobs to reduce rising employment costs.
The Federal Reserve is keenly aware of the wage-price spiral and understands that increasing borrowing costs will eventually force wages to come down as the economy and inflation decline.
Unfortunately, those that just got the minimum wage increase may see their jobs soon replaced by a more cost-effective method.
Lance Roberts is a Chief Portfolio Strategist/Economist for RIA Advisors. He is also the host of “The Lance Roberts Podcast” and Chief Editor of the “Real Investment Advice” website and author of “Real Investment Daily” blog and “Real Investment Report“. Follow Lance on Facebook, Twitter, Linked-In and YouTube
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FAQs
What is the biggest problem with minimum wage? ›
Employees working full-time at minimum wage cannot afford basic necessities, such as food, housing, transportation, childcare, and healthcare in any location across the country.
Why is minimum wage a federal issue? ›The purpose of the minimum wage was to stabilize the post-depression economy and protect the workers in the labor force. The minimum wage was designed to create a minimum standard of living to protect the health and well-being of employees.
What are some arguments against the federal minimum wage? ›Opponents of raising the minimum wage believe that higher wages could have several negative repercussions: leading to inflation, making companies less competitive, and resulting in job losses.
What is one major argument in favor of raising the federal minimum wage? ›Arguments for Raising Minimum Wage: It Will Benefit Millions, Lift Struggling Workers Out of Poverty. The CBO report does have some silver linings: It estimates a federal minimum wage hike to $15 per hour would lift nearly one million people out of poverty and nearly 27 million workers would be affected by the increase ...
Why raising minimum wage hurts the poor? ›In general, increasing the federal minimum wage would raise the earnings and family income of most low-wage workers, lifting some families out of poverty—but it would cause other low-wage workers to become jobless, and their family income would fall.
Does raising the minimum wage cause inflation? ›Position: Minimum Wage Does Not Increase Inflation
While arguments for wage-push inflation exist, the empirical evidence to back these arguments up is not always strong. Historically, minimum wage increases have had only a very weak association with inflationary pressures on prices in an economy.
Thus, since California's current law requires a higher minimum wage rate than does the federal law, all employers in California who are subject to both laws must pay the state minimum wage rate unless their employees are exempt under California law.
Can a family survive on the US minimum wage? ›The minimum wage does not provide a living wage for most American families. A typical family of four (two working adults, two children) needs to work nearly two full-time minimum wage jobs each (a 77-hour work week per working adult) to earn a living wage.
Should we raise the federal minimum wage? ›Raising the federal minimum wage will also stimulate consumer spending, help businesses' bottom lines, and grow the economy. A modest increase would improve worker productivity, and reduce employee turnover and absenteeism. It would also boost the overall economy by generating increased consumer demand.
Why are people fighting for $15 minimum wage? ›The "Fight for $15" movement started in 2012, in response to workers' inability to cover their costs on such a low salary, as well as the stressful work conditions of many of the service jobs which pay the minimum wage.
Why do economists oppose minimum wage? ›
Historically, economists' scepticism was rooted in the worry that wage floors reduce employment. Firms will hire all the workers it makes sense to hire at prevailing wages, the thinking goes, so any minimum wage that forces firms to pay existing workers more will make those jobs uneconomical, leading to sackings.
What would happen if there were no minimum wage? ›Abolishing the federal minimum wage would help small businesses. Some economic theory suggests it would lower labor costs, expand the worker pool, raise profits, and reduce costs for consumers, as businesses tend to pass off the burden onto them. Also, ending it would delay the automation revolution.
Why is minimum wage a controversial topic? ›This controversial topic concerns the belief that a living wage should be a fundamental right for all American workers and is opposed by the belief that regulatory control over wage thresholds risk imposing undue economic burdens on employers with potentially deleterious effects on the economy as a whole.
Who is opposed to raising the minimum wage? ›New polling shows that the vast majority of Republican voters oppose raising the federal minimum wage, although strong majorities of Democrats and independents support the idea.
Will raising the minimum wage reduce poverty? ›Conclusion. Researchers determine that regardless of the scenarios, a federal minimum wage increase would reduce poverty among all race and ethnic groups. Considering this wage increase would likely impact 56 million workers, it has the potential to bring great financial relief to families who need it most.
Who is hurt by the minimum wage? ›Thus, raising the minimum wage hurts low-skilled workers in two ways. First, there are fewer jobs available. Second, with a larger pool of applicants, competition is stiffer. Low-skilled workers have a more difficult time getting those job skills that are crucial to economic well-being.
Does raising the minimum wage do more harm than good? ›Although hiking the minimum wage often feels like the right thing to do, 85% of the most credible, peer-reviewed studies show that raising the minimum wage does more harm than good to entry-level and other low-wage workers.
Has inflation increased so much that minimum wage is no longer livable? ›The federal minimum wage of $7.25 per hour has stayed the same since 2009. As inflation heats up, the value of that minimum pay rate has declined to record lows. A worker earning the minimum wage today makes 27.4% less than they would have in July 2009, adjusted for inflation, the Economic Policy Institute found.
Is the $15 dollar minimum wage causing inflation? ›Minimum wage increases have trivial effects on inflation
If every penny of this higher minimum wage fed directly into higher prices—that is, none of it was financed by higher productivity or lower profits—the move to $15 would create a one-time step-increase in the overall price level of less than 0.5%.
To ease inflation, the Federal Reserve works to reduce the amount of money in the economy by raising the Federal Funds rate, which is the interest rate at which commercial banks lend to each other overnight.
Can states ignore federal minimum wage? ›
States are required to follow federal minimum wage law. States can pass their own laws to make the wage higher, equal to or lower than the federal law, but they can't make other changes that overrule the federal law, for instance, who is exempt or how many hours constitutes a work week.
Which state has the highest federal minimum wage? ›- Washington: $15.74. Living wage: $19.58.
- California: $15.50. Living wage: $21.24.
- Massachusetts: $15. Living wage: $21.35.
- New York: $14.20. Living wage: $21.46.
- New Jersey: $14.13. Living wage: $18.71.
As a result of the recent high inflation, minimum wage increases in states where cost of living is taken into consideration were greater than in years past, according to the Economic Policy Institute.
Can you live off $7.25 an hour? ›According to a 2021 report from Drexel University, individuals working full-time at minimum wage cannot afford the above mentioned basic necessities in any location across the country. The bottom line: For most people, earning $7.25 an hour doesn't cut it as providing a living wage.
Is $15 an hour livable? ›At this point, $15 is the wrong number to focus on. The average apartment rent is 36% higher than it was in 2012. The cost to a worker for family health coverage is 48% more. “In most of the country,” says Rolf, “$15 an hour wasn't enough to live on then, and it's not enough anywhere in the country now.”
What is a livable wage in America? ›An analysis of the living wage (as calculated in December 2022 and reflecting a compensation being offered to an individual in 2023), compiling geographically specific expenditure data for food, childcare, health care, housing, transportation, and other necessities, finds that: The living wage in the United States is ...
Who benefits from a minimum wage increase? ›A large increase to the minimum wage not only increases the wages of those workers who previously earned less than the new minimum wage but also spills over to workers with moderately higher wages.
What state has the lowest minimum wage? ›Currently, 30 states and Washington D.C. have minimum wages above the federal minimum wage of $7.25 per hour. Five states have not adopted a state minimum wage: Alabama, Louisiana, Mississippi, South Carolina and Tennessee. Two states, Georgia and Wyoming, have a minimum wage below $7.25 per hour.
When was the last time the federal minimum wage was raised? ›The federal minimum wage in the United States has been $7.25 per hour since July 2009, the last time Congress raised it. Some types of labor are exempt: Employers may pay tipped labor a minimum of $2.13 per hour, as long as the hour wage plus tip income equals at least the minimum wage.
What are 3 arguments for a higher minimum wage? ›Some economists argue that increasing the minimum wage encourages consumer spending, helps families out of poverty, and boosts tax revenue while reducing tax-funded government assistance.
What should minimum wage be in 2023? ›
Due to the enactment of Senate Bill (SB) 3, the California minimum wage increased to $15.50 per hour, effective January 1, 2023, for all employers.
What is considered a living wage in 2023? ›| State | Livable Wage | Livable Wage (Hourly) |
|---|---|---|
| California | $45,386 | $21.82 |
| New Jersey | $42,786 | $20.57 |
| Maryland | $41,059 | $19.74 |
| Oregon | $40,581 | $19.51 |
What percentage of Americans make minimum wage? Roughly 1.5% of all Americans make the federal minimum wage.
What would a Keynesian say about minimum wage? ›If you really are a Keynesian then you must therefore also believe that the minimum wage causes unemployment. Because built into that very idea of Keynesianism is the idea that prices are sticky, and that those sticky prices for labour create unemployment.
What would a Keynesian say about minimum wage laws? ›The minimum wage sets a lower bound that, even in good times, prevents the least-productive workers from finding work. In recession times, it's even worse. Keynesians in the golden age of Keynesianism were quite critical of the minimum wage and were sympathetic to its victims.
Does raising the minimum wage cause unemployment? ›Raising the minimum wage has positive impacts, such as bringing people out of poverty and increasing income for individuals and families; however, increasing the minimum wage can also lead to increased unemployment, depending on the wage increase, because employers would seek automation as opposed to hiring workers.
Is $15 an hour a livable wage? ›But even at $15 an hour, life doesn't get a whole lot easier. Two adults who work 40 hours a week each and earn $15 an hour make $62,400 before taxes. That's below what the Economic Policy Institute calculates as a living wage for most of the country.
Does minimum wage cause inequality? ›The minimum wage has been regarded as an important element of public policy for reducing poverty and inequality. Increasing the minimum wage is supposed to raise earnings for millions of low-wage workers and therefore lower earnings inequality.