Minimum Wage Increase: Raising It to $9 May Not Be Enough

“Do not let any calamity-howling executive with an income of $1,000 a day … tell you – using his stockholders’ money to pay for the postage for his personal opinions – that a wage of $11 a week is going to have a disastrous effect on all American industry. Fortunately for business as a whole, and therefore for the Nation, that type of executive is a rarity with whom most business executives heartily disagree.” 

This is what Franklin D. Roosevelt said at the time when he signed the Fair Labor Standards Act into law 75 years ago. Unfortunately for us, society hasn’t changed much in terms of the howling executives (or politicians for that matter). As House Speaker John Boehner (R-Ohio) says, “When you raise the price of employment, guess what happens? You get less of it,” or as Sen. Marco Rubio (R-Fla.) claimed, “the impact of minimum wage usually is that businesses hire less people.” 

However, according to a report released by the Center for Economic and Policy Research in February, “the minimum wage has little or no discernible effect on the employment prospects of low-wage workers” and this is because “the cost shock of the minimum wage is small relative to most firms' overall costs and only modest relative to the wages paid to low-wage workers.” 

So while there is economic evidence that raising the minimum wage does not overall negatively affect employment opportunities, does it actually help the workers receiving these “benefits”?

The report explores several “adjustment channels” through which firms will react to an increase in minimum wage, some of which are negative and some are positive. The negatives include reductions in non-wage benefits or training, as well as a reduction in hours worked (this is because “the minimum wage does not raise the cost of hiring workers — it raises the cost of hiring an hour of work performed by those workers”). There are more positive outcomes such as improvements in operational efficiency including tighter human resource practices and enhanced customer services. There are also instances of “efficiency wage” responses from workers, meaning being paid more money will independently motivate them to work harder and more productively. 

But is President Obama’s call for an increase of the minimum wage from its current $7.25 value to $9 enough for the good to outweigh the bad?

Some critics of Obama’s plan — including Ralph Nader and the Center for the Study of Responsive Law’s petition, TimeForARaise.org — are saying $9 an hour is not enough when factoring in inflation. “Had the federal minimum wage simply kept pace with inflation since 1968, it would be $10.70 per hour today instead of the current $7.25,” as Nader wrote in his letter to the president dated June 25, 2013.

Even candidate Obama back in 2008 thought $9 was too little when he campaigned for an increase to $9.50 an hour by 2011. Eighteen states and the District of Columbia have minimum wage rates higher than the federal level. Ten states – including Rhode Island, Colorado, Vermont and others – have indexing laws, which automatically adjust the rate with rising living costs. 

The White House claims the proposed legislative action to increase the rate to $9 an hour will positively impact the wages of 15 million low-income workers

Although it seems like less than what we were expecting from this administration, it appears to be a step in the right direction towards income equality.