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It's Tricky: The Minimum Wage's Maximum Complexities

It's Tricky: The Minimum Wage's Maximum Complexities

Earlier this month, a coalition of Walmart workers and supporters rallied in 15 U.S. cities to protest minimum wage laws. The group, which also included members of the United Food & Commercial Workers union, said a large percentage of Walmart’s 1.3 million workers are part-timers making an average of $8.80 an hour. The protesters say the retail giant should pay full-time wages of $25,000 a year or $12 an hour.

Kimberly Amadeo

According to author Kimberly Amadeo [“Beyond the Great Recession”; About.com’s Guide to the U.S. Economy], while the protesters’ demands appear reasonable on the surface, there are issues on the employer’s side of the argument—as well as concerns about the overall economic impact—that the protesters aren’t taking into consideration.

“Raising the bottom rung of the wage ladder may lead to unintended drawbacks for consumers,” Amadeo says. “If they’re successful, less jobs and increased prices could be on the horizon.”

We wanted more details about Amadeo’s take on the subject. The following email Q&A is the result.

IndustryWeek: Do you think the type of wage increase the Walmart protesters are calling for would have an overall positive or negative impact on the U.S. economy?

Kimberly Amadeo: It would have both. A minimum wage would boost economic growth by giving workers more money to spend. This increases demand, further boosting business growth. Workers would have the money to invest in their own education, further increase their productivity over time, and improve the attractiveness of the country’s labor pool. A more highly educated workforce increases innovation by starting their own businesses.

Businesses with a minimum wage may find that workers would be less likely to leave to find a higher-paying job. This reduces turnover and expensive retraining costs.

However, it would not do much to relieve poverty. A study by David Neumark and William Wascher found that minimum wages force an overall reduction of jobs for less-skilled workers, reducing their earnings and adding to poverty overall.

IW: Would increasing the federal minimum wage to $12 an hour have a net-positive or net-negative effect on the unemployment rate?

KA: It would raise the unemployment rate, because many companies will have to reduce the number of jobs so they can pay their remaining employees more. This especially impacts small businesses, which create 65% of all new jobs. They are less likely to have the flexibility to lay off workers OR raise prices. This could drive many small businesses to ruin, especially if it comes right now when many are still struggling.

Impact on Manufacturing, Prices

IW: What would be the main effects of increasing the federal minimum wage to $12 on U.S. manufacturers?

Kimberly Amadeo

Larger manufacturers have more flexibility to either get by with fewer workers or raise prices. Manufacturers are more capital-intensive, especially now that they rely more on robots to oversee a lot of their procedures. Raising the minimum wage won’t impact them as much. However, in the long run, global manufacturers will start outsourcing jobs back overseas. During the recession, they started pulling them back to the U.S. because wages started coming down.

IW: What impact would increasing the federal minimum wage to $12 have on consumer prices?

KA: Prices would rise for some goods and services, but not others. It depends how much demand would change for higher prices, how much labor costs factor in the end price, and how important price is to the business.

For example, labor is a big cost factor of food services. McDonalds, which is known for low-priced food, would probably not raise its prices much, and so would try to get by with fewer workers. On the other hand, a high-end restaurant could raise prices because it’s known for the quality of its food and service. It couldn’t get by with fewer workers.

IW: If a raise in the federal minimum wage were to happen, what hourly wage would strike the best balance between employers and workers?

KA: The federal poverty level [2012] is $23,050 for a family of four. That’s equivalent to $10.60 per hour for a full-time worker. A worker making the minimum wage of $7.20 per hour would be below the poverty level.

Therefore, $11 an hour would keep workers above the poverty level. However, it really depends on the cost of living in each region of the country, which is why a national minimum wage is so tricky. For example, according to Kiplinger’s, the city with the lowest cost of living is Winston-Salem, N.C. The MIT Living Wage Calculator says that a single person must earn $8.11 per hour to afford the average housing, medical, food and transportation costs to live there.

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