As expected, President Barack Obama argued for environmental, educational, and budgetary reforms in his State of The Union address last night. His argument for a $9 minimum wage, however, made some news. It is seen as a dicey political move at at time when hiring remains stagnant and business interests continue to find the president's positions polarizing. Republicans have made the argument that a higher minimum wage would hurt job growth, which would only deny work to impoverished families at a time when unemployment remains high.
Speaker of the House John Boehner, who voted against a 2006 minimum wage increase from $5.15 to $7.25, said he opposed the president's goal to raise it this year.
"When you raise the price of employment, guess what happens? You get less of it. At a time when Americans are still asking the question, 'Where are the jobs?' why would we want to make it harder for small employers to hire people?" Boehner said at a press conference following the State of the Union Address.
Economists' conclusions about the effects of an increased minimum wage on the unemployment rate and job growth in general are mixed. A 2012 Texas A&M University paper entitled “Effects of the Minimum Wage” by Jonathan Meer and Jeremy West found that higher wages significantly reduce the rate of job growth. The economists cite a 2003 study that shows minimum wage workers commonly see rapid transitions to higher wages, with almost two-thirds of workers getting a raise after being employed one year.
Meer and West argue that the unemployed can never enter the workforce and gain experience, which would eventually lead to a raise, if the wages are too high to allow for more hiring. “If higher wages reduce employment entry, they may never have the opportunity to develop the skills or tenure to earn higher wages,” the paper reads.
The problem with studying wage growth, however, is that there is no permanent control group because there are frequent changes in state laws or federal wage increases. “Minimum wage affects new employment so it will take years to observe a statistically significant effect on total unemployment,” the economists reported.
When asked whether or not it is possible for the minimum wage to have a stimulative effect on the economy, via more consumer spending in the marketplace, Meer tells Minyanville that the effect would be negligible.
“The amount of money involved is extremely small as there really aren’t that many minimum wage earners, and it’s a transfer from business owners to workers,” Meer said in an interview. “The owners will therefore spend less. It’s highly doubtful that whatever stimulative effect this transfer produces can outweigh the effect of increased labor costs.”
Last year, Vice President of the Economic Policy Institute Ross Eisenbrey argued that there wouldn't be a correlation between unemployment and a minimum wage increase from a minimum wage increase in July 2012, saying there were not significant employment losses when President Truman raised the minimum wage by 87% in 1950, or when wages rose by 28% in 1967.
A new paper from the left-learning Center for Economic and Policy Research also finds that modest increases in the minimum wage have had little impact on employment. The paper also notes that employers can adjust to a new minimum wage by finding money through other avenues such as reducing hours, non-wage benefits, or training; shifting the composition toward higher skilled workers; and cutting pay to more highly paid workers. The paper also argues that the minimum wage increase would be fairer since the minimum wage stopped keeping pace with productivity in the 1970s.
It's also a popular policy. Two-thirds of Americans supported raising the minimum wage in a Public Religion Research Institute poll in 2010. More recently, residents of Albuquerque, New Mexico, San Jose, California and Long Beach, California voted for local minimum wage increases on election day.
There are 20 states now offering wages above minimum wage, with Washington offering the highest at $9.04 and Rhode Island offering the lowest at $7.40. According to the US Department of Labor, the lowest an employer can pay a minimum wage worker who receives tips is $2.13 per hour. Workers under 20 years old can be paid $4.25 per hour during their first consecutive 90 days of employment under the condition that they do not displace other workers.
Here is a graph showing a rise in the minimum wage from 1938 to 2009:
No positions in stocks mentioned.