On February 19, Bernie Sanders announced that he, too, would be running for president in 2020. With a platform focusing on combating the income inequality gap through higher taxes for the wealthy and increasing the federal minimum wage to $15 an hour, he sounds like a great choice, right? Well, minimum wage is one of the most highly debated concepts amongst economists because although people need to be making a livable wage, a high minimum wage can be detrimental to businesses and employment rates in the long run.
A 2018 study published in the American Economic Review illustrates that a 1 percent increase in wage leads to a 0.3-1 percent decrease in employment in the long-run among businesses or industry-wide depending on where the wage increase is implemented. Rather than laying-off employees or figuring out another way to decrease costs, businesses often just close, which is why employment rates are seen to be decreasing in the long-run rather than the short-term.
However, minimum wage increases affect various cities differently; in Los Angles, for example, minimum wage is around $12 an hour, so a slight increase will not have as big of an effect compared to an increase in wages in Detroit, where minimum wage is only $9.25 an hour.
On paper, minimum wage seems like a bad idea – it puts pressure on small businesses, and it increases a business’s input costs, which means that they will likely decrease supply to combat a higher cost of labor. Socially, it seems necessary. With inflation and the standard of living on the rise, wages cannot stay stagnant. Wages are not mirroring the gradual increase in prices, which means the purchasing power of your dollar decreases as prices rise. This means living becomes more expensive; it’s more costly to buy groceries, and necessities – like gas for your car – become questions rather than absolutes. Most economic theory suggests that deregulation of businesses will promote more livable wages, but again, that’s in theory. Many believe that businesses cannot be trusted to ensure fair wages for all and will instead use the deregulation for their own gain to hire cheaper laborers.
If raising the minimum wage isn’t the solution, how do we ensure that lower-income families have a livable salary? One idea is to raise the Earned Income Tax Credit (EITC) and decrease the age at which someone can receive the credit; the EITC provides support to low-income families and childless workers up to a maximum of $6,431. However, those without children can only get a maximum of $519, which is clearly not substantial. Raising the EITC would provide more non-taxed dollars for lower-income families to boost their current economic standings, and both Republicans and Democrats have motioned to do so. In addition, while the current age for which a family is eligible to receive EITC is 25, young mothers make up a significant percentage of low-income households, so lowering the age would be incredibly beneficial to those families. Another solution would be to offer training or free-schooling to those currently working low-wage jobs. Minimum wage jobs are meant for unskilled or inexperienced workers, which is why a lot of teenagers and those who have been out of the labor force for long periods of time work in such jobs. By offering training or tuition to a local university, companies are giving their workers the tools they need to succeed in more professional careers, ones in which they will earn a more livable wage. There are many solutions to help those in need, but Bernie’s minimum-wage raise doesn’t seem to be one of them. The $15 federal minimum wage proposal appears good in theory, but the economics just don’t back it up. The increase would be detrimental to small businesses and employment rates in the long run, so although it may seem like the socially acceptable thing to do, it just isn’t feasible.