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The Economics of Minimum Wage

(Posted December 31, 2013)

Brad Andrew, associate professor of economics Kelly Russo '14

The Economics of Minimum Wage

On Dec. 5, workers from large food chains such as McDonalds and Wendy's went on strike in 100 different U.S. cities, demanding a higher wage of $15 an hour. Currently, many of these workers are paid minimum wage ($7.25/ hour) and contend that this is not enough money to support themselves and their families. The National Restaurant Association, a critic of the strike, claims that increasing hourly pay would cause employers to cut jobs. Some economists argue that increasing the minimum wage would benefit the economy by putting more money into the pockets of potential consumers. President Obama acknowledged the plight of blue-collar workers during a speech delivered in an extremely impoverished area of Washington, D.C. He said, "The combined trends of increased inequality and decreasing mobility pose a fundamental threat to the American dream, our way of life and what we stand for around the globe." Brad Andrew, associate professor of economics at Juniata, comments on the strikes and the economics of minimum wage.

Q: Can you explain why workers are demanding higher wages?

A: I guess it's best to start out by saying there's been a long-term hollowing out of the middle class, particularly blue-collar middle class. So, while unemployment rates are not terribly higher than they were 40 years ago, what's happened is that the composition of jobs has changed. There are fewer blue-collar middle class jobs in factories for example. There's still jobs created for working class people, it's just that they don't pay nearly as much as the factory jobs of 40 to 50 years ago. In the late 1970s, the wage premium (college vs. high school degree) was 30 percent, so there wasn't a huge gap. It's become significantly larger now: 80 percent. There's a much higher payoff to going to college. A higher percentage of the jobs are entry level in service sectors. They're not nearly as unionized and generally easier to replace, So what happens is there is a higher percentage of people in the U.S. with just a high school diploma in lower wage jobs. Basically, the high-wage sectors are smaller now and don't employ as many people. It's a victim of its own success because manufacturers have gotten so efficient that they don't need as many workers. Jobs at McDonalds, Walmart and janitorial jobs don't pay nearly as much.

Q: Is our current minimum wage too low?

A: When you're talking about an increase, you need to specify how much. Phasing it in over a longer time period is a different situation. A negative impact of raising minimum wage is that young workers often find it harder to get jobs. The jobs that are being created just don't pay as much and employers would rather hire an older, more experienced person than a kid who is more likely to be irresponsible. I don't dispute that it's extraordinarily difficult to get by on minimum wage, but I don't think raising minimum wage is the way to do it because it will affect the employees in some unanticipated way.

Q: Would raising minimum wage lead to fewer jobs?

A: Here's the problem with minimum wage; if you're a full-time worker and your employer is paying benefits as well as salary, as an employer, if you're forced to pay a higher wage, one way to compensate is by reducing benefits. So you have to be careful when enforcing the law with such blunt objects because there are secondary affects. The likely outcome is that they'll try to reduce costs elsewhere. If you raise the price of anything, what happens to the amount that people buy? There's a real concern that if you raise minimum wage, they will cut employee hours or cut employees. And that's a real problem.

Q: So what's the solution?

A: There's a program right now called "Earned Income Tax Credit" and it is a refundable tax credit. One of the problems with government benefits is that once you start working, you lose them all. Many people, if they are poor and they have an option of working with health insurance or not working, but getting health insurance, many will choose the latter because of the benefits that are offered. What the EITC does, basically, is it makes work more rewarding financially by increasing your tax refund in many cases by an amount that exceeds what you paid in taxes. We must acknowledge the low-wage workers, but using a raise in minimum wage to acquire more money often causes secondary affects that hurt the goal. The EITC uses the progressive tax system and basically, you get a bunch of higher income people who are sending checks to poor people via the federal government. This is a better method than raising minimum wage because it won't lead to unemployment.

-Hannah Jeffery '16, Juniata Online Journalist

Our readers respond...

I totally agree with the analysis and synopsis of this article!! As a friend from work used to say….." be careful what you ask for"!!
Thank you.

Peter Waplinger
Solutions Engineer, GE

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