At first, raising the minimum wage nationally sounds like a great idea; fry cooks at McDonald’s will bring home a number north of the current rate of $8 an hour to their families to put food on the table, but what about those whose salaries drop to zero — those who lose their jobs with a decreased demand for workers? Contrary to popular belief, increasing the minimum wage can actually hurt low-wage workers.
Recently, an NFL cheerleader on the Cincinnati Bengals, Alexa Brenneman, took action against the team with the claim that she was making less than minimum wage. A cheerleader named Lacy T, whose full name has not been disclosed, filed a law suit against the Oakland Raiders in January for a similar reason, and now more cheerleaders have been coming out to join her, realizing that their hourly wages are unacceptably low.
Brenneman was paid $855 for her time on the Ben-Gals squad, and she claimed to have worked for 300 hours performing, practicing, and attending events. The minimum wage rate in Ohio is $7.95 per hour, but her pay came down to about $2.85 an hour.
In Ms. Kornblatt’s Economics course, we broke down the pros and cons of raising the minimum wage as a class.
You see, it is all about supply and demand. The minimum wage is a price floor, and a price floor is a government regulation that places a lower limit on the price at which a particular good, service, or factor of production may be traded. The equilibrium price is where the supply of goods matches up with the demand, and if the equilibrium price is above the price floor (minimum wage), there is no effect on the market. However, if the equilibrium price is below, like it is in the diagram below, there will be a surplus of labor.
When the minimum wage increases, the quantity of jobs supplied becomes greater than the quantity demanded because the number of people seeking jobs stays the same. Consequently, employers must cut back on the number of workers they hire since they can’t afford to employ as many anymore. As a result, some lucky people will keep their jobs and make more money, while others will be laid off. In other words, the unemployment rate increases.
Those who are hurt the most by an increase of the minimum wage are inexperienced and unskilled workers because they are the first to go when firms are forced to lay people off. Ironically, the people who advocate for a higher minimum wage are usually trying to help out the workers at the bottom of the totem pole. Unfortunately in reality, raising the minimum wage could put those people out of work. The labor-force participation rate is negatively related to changes in the minimum wage.
The labor market can be divided into two sectors: that covered by the minimum wage law and that not covered. By raising the minimum wage, employees that are laid off in the covered sector are encouraged to search for work in the uncovered sector. This sector is not regulated, and so workers have to compete to see who will work for less pay and under the worst conditions. This causes low-wage earners in the uncovered sector to be even poorer than they otherwise would have been.
Raising the minimum wage allows for employers to exercise their existing racial preferences. When a firm has to lay employees off, it often chooses the high-skilled workers over the low-skilled workers and sometimes those that fall into the employer’s racial preference over those who do not. This can also work the other way. For example, a white employer may not be able to restrict employment to whites when blacks are willing to work for less.
Teenagers are also barred from the work force when the minimum wage increases. They lose their first opportunities to accumulate human capital that would make them more valuable employees in the future. Raising the minimum wage leads to worse resumes for young people and longer time until they can get decent employment because they have no work experience.
Additionally, customers are hurt by an increase in the minimum wage because it reduces the quality of service. The incentives for workers to work hard decreases. At the same time, businesses have to pay their workers more than they did before, decreasing the amount of profit generated.
But we cannot completely hate on the minimum wage because we have to understand why it was enacted at all. It was designed to increase employment and purchasing power so that the economy could get back up on its feet and to force employers to focus on better quality products and better production methods. It was also put in place to sustain high living standards for everyone. A job that does not pay enough to support a family should not exist; if the firm is paying so little, it should be driven out of the marketplace.
Now that I have laid out the two sides of the debate, I will offer some alternatives to raising the minimum wage:
Instead of raising the wage, the government can help workers find and generate new, higher paying jobs by increasing employer demand for workers, creating job-training and education programs, and improving labor market mobility.
Keep in mind that this is called the minimum wage debate for a reason. If there was a clear-cut solution, it would have already been implemented.