Why Federal Minimum Wage Should be Raised, but Cant

Every election cycle, the issue of minimum wage increase comes up, and this election cycle is no different. On one spectrum you have candidates who are calling for an increase of minimum wage from $7.25 to an astounding $21.76. On the other end, you have candidates asking, “Is someone who works at Whataburger and is frying your frying your French fires really worth $15?” What if I told you the answer was yes, and no? While both sides have their arguments, by using economic data aka numbers vs political propaganda and total BS, there is only one truth- the minimum wage without a doubt should be raised. The truth however, often has an ugly side, and there is no exception to this when it comes to the minimum wage argument. The ugly truth you ask? By using the same economic data, it’s not economically feasible to raise the federal minimum wage to a livable standard.

What is Minimum Wage Exactly?

So, first off what is “minimum wage,” and when did we adopt this practice?

min·i·mum wage- noun

the lowest wage permitted by law or by a special agreement (such as one with a labor union).

Makes enough sense right?

The minimum wage argument in the United States dates back to the early attempts of labor unions to create a mandatory minimum wage for its members. The issue reached the U.S Supreme Court where minimum wages were ruled unconstitutional on the grounds that they "restricted the worker's right to set the price for his own labor.” When the Great Depression hit in the 1930s, this was a major blow to workers, because it allowed employers to exploit their employees at a time when there was an incredible demand for jobs.

During FDR’s race for his 1936 re-election, he ran on the promise that he would constitutionally protect American workers. He made good on this promise in 1938 when he signed the fair labor and Standards Act (FLSA) in law. The FLSA introduced sweeping regulations to protect American workers from being exploited, and created a mandatory federal minimum wage of 25 cents an hour in order to maintain a "minimum standard of living necessary for health, efficiency and general well-being, without substantially curtailing employment".

In the years since the FLSA was introduced, the federal minimum wage was revised by Congress every few years to account for inflation and the ever rising cost of living (although, in the years after the FLSA was introduced, Congress has actually reduced the Minimum Wage several times). In 1997, President Bill Clinton introduced legislation allowing individual states to set their own minimum wage rates, and as a result several states have minimum wages that are higher than the federal minimum wage. For example, the current federal minimum wage is $7.25, but just this week, California passed a law to raise their state minimum wage to $15.  

The Argument to Raise Minimum Wage

As always, there are multiple sides to this argument:

1.    People with more liberal tendencies who believe it should be raised, and raised significantly.

2.    People with more economic conservative tendencies who believe it shouldn’t be raised.

3.    People who think we should have two separate wages: a living wage for adults, and a separate minimum wage for teenagers.

4.    People who have no idea what’s going on.

Here’s a nifty chart that tells you WHY people are for/against drastically raising minimum wage: 

Both sides have valid arguments that are backed up by economic data, theory, and practice, but what's really the TRUTH?

The Economic Science

As stated above, minimum wage is adjusted every few years to take into account inflation. Inflation is the “sustained increase in the general level of prices for goods and services.” In laymen’s terms, inflation can be described as the percentage increase of a $1 bill on a year to year basis. For instance, you buy a tube of chap- stick today for $1. If the current inflation rate is 2%, in one year, that same tube of chap-stick would cost you $1.02. Since the passing of FLSA in 1938, the U.S inflation rate has risen 3.65% annually, and overall 1,542.53%. This means the purchasing power of the $1 bill has gone from $0.97 in 1939, to $16.42 in 2016. If you compare this to the growth of minimum wage, minimum wage has only grown by 700%.  Here’s a graph we made to show you the rate of inflation vs. federal minimum wage.

 

By now, you should be thinking, “Well, shouldn’t minimum wage have been increased to the rate of inflation?”, and you would be correct in that assumption. So, what should the minimum wage rate be by inflation’s standards? We did the math, and the actual wage should be $15.43. That’s $8.18 more than the $7.25 wage we currently have. As simple as the solution to just raise the minimum wage from $7.25 to $15.43 seems, it is not economically feasible for a few reasons that cannot be ignored.

Feasibility Factors

At this point in time, it would kill small business, and consequently, jobs.

You can thank past lawmakers and our parents who voted them in for this. Poor planning and special interests have made it to where the equilibrium point of the market swings at our current cost of labor, or minimum wage. The cost of goods and services are aligned with each other, and many small businesses would not have the ability to sustain the shock that would come with the unbalance. It’s true that after a long and painful amount of time, the market would readjust itself, but not at the expense of thousands of small business owners. This would create a negative trickledown effect, especially in states that have lower costs of living than others (more on that later) .It would eliminate jobs. Ordering businesses to pay entry-level workers more will make them hire fewer of them, and consider replacing more workers with robots or computers. That’s good if you are in the robot or computer business, but not so good if you are trying to combat unemployment. The nonpartisan Congressional Budget Office estimated that President Obama’s proposed $10.10 wage, once fully implemented, “would reduce total employment by about 500,000 workers.” In an economy where the REAL unemployment rate is closer to 10% (based on the U-6 rate that measures not only those unemployed, but those who have given up hope, and dropped out of the job market), we just cannot afford the instability. If the minimum wage requirement had risen with inflation this wouldn’t be an issue, but unfortunate it’s the truth.

It’s always best to let state’s make their own decisions.

Like I said, we are going to touch on the fact that different states have different costs of living. Let’s compare Texas and California. Texas has the second-lowest cost of living at 90 percent. Thus, California's previous $8 minimum wage could buy $6.06 of goods and services while Texas' $7.25 minimum wage can buy the equivalent of $8.04. California's poverty rate at 23.5 percent, the nation’s highest, while dropping Texas' poverty rate to 16.5 percent. The numerical figures that we have used to compare inflation and federal minimum over the past 78 years are all on a national level. This means that states like Texas with historically low costs of living and poverty rates are averaged in with states who have polar-opposite rates like California Thus,  $15 or more minimum wage makes sense for states like California and its constituents, while it does not necessarily make sense for states like Texas and its constituents. Not only does the cost of living vary from state to state, it varies dramatically from city to city. Let’s examine Dallas and San Antonio. Based on the newest April 2016 numbers from Numbeo.com, “You would need around 3,979.95$ in Dallas, TX to maintain the same standard of life that you can have with 3,500.00$ in San Antonio, TX (assuming you rent in both cities). This calculation uses our Cost of Living plus Rent Index to compare cost of living. This assumes net earnings (after income tax).” Here’s some more comparison:

Consumer Prices in Dallas, TX are 11.68% higher than in San Antonio,

TX Consumer Prices Including Rent in Dallas, TX are 13.71% higher than in San Antonio,

TX Rent Prices in Dallas, TX are 17.80% higher than in San Antonio,

TX Restaurant Prices in Dallas, TX are 21.57% higher than in San Antonio,

TX Groceries Prices in Dallas, TX are 1.13% higher than in San Antonio,

TX Local Purchasing Power in Dallas, TX is 8.44% higher than in San Antonio, TX

Basically, the point I’m trying to make is that states and cities should have the real power when it comes to a standard minimum wage, not the government. State and local lawmakers are more easily able to listen to their constituents, vs federal lawmakers, who often don’t even live in the states they represent the majority of the year.

While you can argue and argue over if minimum wage is currently a livable wage, the truth is that its not anywhere near a livable wage in 2016's standards.  If there's one thing we can unequivocally agree on, its that past lawmakers screwed us out of that livable wage. While the people who are running the country are squabbling over something that bare numbers, a little research on Google, and some simple math equations could give them definitive answers to, millions of American workers are suffering. The best way to solve this situation moving forward is to find ways to increase the minimum wage graduaklly, but at a faster rate than years fast to acclimate the market to rising wages, and to let the states regulate minimum wages, vs the federal government who time and time again has shown us they dont care about "we the people."

Citations:

"History of the United States Minimum Wage | Minimum-Wage.org." History of the United States Minimum Wage | Minimum-Wage.org. N.p., n.d. Web. 08 Apr. 2016. <http://www.minimum-wage.org/history.asp>.

"Raising Minimum Wage - Is Federal Minimum Wage Fair?" Raising Minimum Wage - Is Federal Minimum Wage Fair? N.p., n.d. Web. 08 Apr. 2016. <http://www.minimum-wage.org/raising-minimum-wage.asp>.

"Inflation: What Is Inflation? | Investopedia." Investopedia. N.p., 01 Dec. 2003. Web. 08 Apr. 2016. <http://www.investopedia.com/university/inflation/inflation1.asp>.

"Minimum Wage - U.S. Department of Labor - Chart1." United States Department of Labor. N.p., 09 Dec. 2015. Web. 08 Apr. 2016. <https://www.dol.gov/featured/minimum-wage/chart1>.

"Calculate the Value of $1 in 1938 - Inflation on 1 Dollars - DollarTimes.com." Calculate the Value of $1 in 1938 - Inflation on 1 Dollars - DollarTimes.com. N.p., n.d. Web. 08 Apr. 2016. <http://www.dollartimes.com/inflation/inflation.php?amount=1&year=1938>.

"9 Reasons Why Raising the Minimum Wage Is a Terrible Idea."Reason.com. N.p., 03 Mar. 2014. Web. 08 Apr. 2016. <http://reason.com/archives/2014/03/03/9-reasons-why-raising-the-minimum-....

"Charts: What's the Real Unemployment Rate?" CNBC. N.p., 08 Jan. 2016. Web. 08 Apr. 2016. <http://www.cnbc.com/2016/01/08/whats-the-real-unemployment-rate.html>.

 

"Texas vs. California - Myth-busting Time." SFGate. N.p., n.d. Web. 08 Apr. 2016. <http://www.sfgate.com/opinion/openforum/article/Texas-vs-California-myth....

 

"Cost of Living Comparison Between San Antonio, +TX and Dallas,+TX ."Cost of Living Comparison Between San+Antonio,+TX, United+States And Dallas,+TX, United+States. N.p., n.d. Web. 08 Apr. 2016. <http://www.numbeo.com/cost-of-living/compare_cities.jsp?country1=United%....