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.”
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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 3 arguments against a higher 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.
Is the minimum wage more of a federal issue or a state issue? ›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.
What would happen if there was 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.
What will the federal minimum wage be in 2023? ›| State | 2022 Minimum Hourly Wage | 2023 Minimum Hourly Wage |
|---|---|---|
| California | $14.00 for employers with 25 or less workers; $15.00 for larger businesses. | $15.50 for all employers. |
| Colorado | $12.56 | $13.65 |
| Connecticut | $14.00 | $14.00 |
| Delaware | $10.50 | $11.75 |
According to the basic economics 101 explanation, an increase in the minimum wage motivates more people to enter the labor market because they will earn more money. At the same time, an increase in the minimum wage increases firms' costs and the quantity of labor demanded decreases (firms hire fewer workers).
How does minimum wage affect people? ›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.
Is the minimum wage good or bad? ›Some studies find that the minimum wage has significant benefits for workers; others conclude that it is harmful. Many studies have been inconclusive. Even so, there appears to be a growing consensus that when the minimum wage is set at a moderate level, the impact on employment is modestly negative.
What are the pros and cons of 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. Other economists point out the cons of raising the minimum wage, like increased inflation and unemployment.
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.
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.
How to solve minimum wage problems? ›Employers might invest in machines, robots and software as a cost-effective solution to minimum wage increases. Another reactive strategy may be the increased use of independent contractors over salaried workers to save money on benefits.
What is the downside of a federal minimum wage? ›Raising the minimum wage, instead of allowing the free market to determine an appropriate rate, will decrease employee compensation, while forcing businesses to close, use automation, or outsource jobs. Raising the federal minimum wage would exacerbate income disparities and the cycle of poverty.
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.
What happens if a state has a lower minimum wage than the federal? ›What about if the local minimum wage is lower than the federal? If the state or local minimum wage is lower than the federal minimum wage, you must pay your employees at least the federal minimum wage rate.
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.
Was minimum wage ever enough? ›At its high point in 1968, the minimum wage was high enough for a family of three to be above the poverty line with the earnings of a full-time minimum-wage worker, although it still fell short for a family of four.
Why does raising minimum wage not cause unemployment? ›Does Increasing the Minimum Wage Increase Unemployment? Increasing the minimum wage does have the risk of increasing unemployment, depending on the increase of the wage. The thought process is that increasing the minimum wage would increase the costs for businesses, resulting in them hiring fewer workers.
What is the new pay raise for federal employees 2023? ›The figure marks an increase over the 4.6% pay hike feds received in 2023, and would be the highest proposed pay hike federal workers have seen since the Carter administration implemented a 9.1% average pay increase in 1980.
What US state has lowest minimum wage? ›
Federal minimum wage is still $7.25, but more than 20 states will increase minimum wage in 2023. California has the highest minimum wage. Georgia and Wyoming have the lowest minimum wage.
How many states pay the federal 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.
Does 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.
How many jobs would be lost if minimum wage increase? ›Opponents of a $15 minimum wage often refer to a report from the U.S. Congressional Budget Office that estimates increasing the wage to that level would reduce employment by 0.9 percent, or 1.4 million workers, by 2025.
Why do most economists oppose raising the minimum wage? ›Most noneconomists believe that minimum wage laws protect workers from exploitation by employers and reduce poverty. Most economists believe that minimum wage laws cause unnecessary hardship for the very people they are supposed to help.
How to survive on minimum wage? ›- Evaluate Your Overall Spending. ...
- Create and Stick to a Budget. ...
- Put Some Money Towards Savings. ...
- Look Into Government Benefits. ...
- Save on Food. ...
- Find Additional Ways to Increase Your Income. ...
- Lower Your Housing Costs. ...
- Work Towards Reducing Your Debt.
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%.
Conclusion. Researchers conclude minimum wage increases are associated with better health outcomes and that recent proposals to raise the minimum wage have potential for large, meaningful economic and health impacts on low-wage workers and their families.
Why do we need minimum wage? ›The purpose of minimum wages is to protect workers against unduly low pay. They help ensure a just and equitable share of the fruits of progress to all, and a minimum living wage to all who are employed and in need of such protection.
What are 3 pros of minimum wage? ›While some critics of minimum wage argue that the law harms workers and interferes with business development, advocates point to several advantages, including the protection of workers, improving the economy and motivating employees to higher standards of performance.
What is the purpose of minimum wage? ›
Purpose of Minimum Wage
It prevents employers from exploiting their workers. Minimum wage provides enough income, which enables workers to have enough money for food, shelter, and clothing. Minimum wage can be seen as a form of a policy to reduce inequality and poverty.
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 ...
How does minimum wage protect workers? ›The minimum wage is the lowest legal wage that companies can pay their workers. The purpose of minimum-wage laws is to prevent employers from exploiting workers. The minimum wage should provide enough income to afford a living wage, the amount needed to provide enough food, clothing, and shelter.
How much should minimum wage be? ›| [state] State | [locality] Locality | [min_wage last_inc] Most recent increase |
|---|---|---|
| Arizona | Flagstaff | $15.50 to $16.80, effective 1-1-2023 |
| Arkansas | $10.00 to $11.00, effective 1-1-2021 | |
| California | $15.00 to $15.50, effective 1-1-2023 | |
| California | Alameda | $15.00 to $15.75, effective 7-1-2022 |
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.
What is causing inflation? ›Cost-push inflation results because imports are now more expensive which creates an imbalance on the supply (cost) side. Demand-pull inflation, caused by increased demand for domestic products both at home and abroad, can result in more demand than supply. Prices can rise and inflation result either way.
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.
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 causes high wages? ›The most common reason for raising wages is an increase in the minimum wage. The federal and state governments have the power to increase the minimum wage. Consumer goods companies are also known for making incremental wage increases for their workers.
What two factors have the biggest impact on wage rates? ›Changes in Demand and Supply. If wages are determined by demand and supply, then changes in demand and supply should affect wages. An increase in demand or a reduction in supply will raise wages; an increase in supply or a reduction in demand will lower them.
What are the problems that minimum wage causes? ›
- Increased Labor Costs. The immediate issue with a higher minimum wage, if you're an employer, is the potential for your labor costs to increase. ...
- Driving Unemployment Rates. ...
- Driving Up Pricing. ...
- Not Helping Enough People.
Federal minimum wage law supersedes state minimum wage laws where the federal minimum wage is greater than the state minimum wage. In those states where the state minimum wage is greater than the federal minimum wage, the state minimum wage prevails.
Who controls the federal minimum wage? ›The Department of Labor's Wage and Hour Division administers and enforces the federal minimum wage law.
What is one argument for raising the 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.
Who gets paid federal minimum wage? ›To whom does the minimum wage apply? The minimum wage law (the FLSA) applies to employees of enterprises that have annual gross volume of sales or business done of at least $500,000.
Which state has highest 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.
Which States Have a $15 per Hour Minimum Wage? Washington, California, and Massachusetts are the states with a minimum wage of $15 per hour or above. Workers from Connecticut will have something to smile about as we get to mid-2023.
Is $15 an hour enough to live on? ›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.”
Is $15 an hour a living 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.
What is a good monthly income for a family of 4? ›| . | FAMILY SIZE | |
|---|---|---|
| STATE | 1 EARNER | 4 PEOPLE * |
| Arizona | $52,334 | $80,956 |
| Arkansas | $43,585 | $68,341 |
| California | $57,962 | $96,813 |
Is minimum wage good or bad? ›
Some studies find that the minimum wage has significant benefits for workers; others conclude that it is harmful. Many studies have been inconclusive. Even so, there appears to be a growing consensus that when the minimum wage is set at a moderate level, the impact on employment is modestly negative.
What are the effects of minimum wage? ›Motivation. The main case for a minimum wage is that it helps poor and low-income families earn enough income. However, the potential downside is that it may discourage employers from using low-wage, low-skill workers. If minimum wages reduce employment for low-skill workers, winners and losers will emerge.
What will the 2024 federal pay raise be? ›Even with a largest in decades pay raise, inflation could keep fed salaries trailing behind the private sector. President Biden, in his FY 2024 budget, has proposed a 5.2% pay raise for feds. Sounds pretty good. An extra nickel over every dollar feds earned just last year.
What is the federal pay raise for 2023 October? ›President Biden signed an executive order on Dec. 23, 2022, officially boosting pay for many civilian federal employees. General Schedule (GS) employees will receive a raise of 4.1 percent across-the-board in 2023, and a 0.5 percent locality adjustment.
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.
Is $7.25 a livable wage? ›A single mother with two children earning the federal minimum wage of $7.25 per hour needs to work 252 hours per week, the equivalent of almost six full-time minimum-wage jobs, to make a living wage. Across all family sizes, the living wage exceeds the poverty threshold, often used to identify needs.
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.