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Breaking Economics 101 and, Ridin’ with Biden on the $15 minimum wage

Published on 13 February 2021 at 17:35

The newly elected American President, Joseph R. Biden, is on the warpath along with much of the Democratic party, to pass the $1.9 trillion Covid-19 relief packages through the US Congress.

 

Among the debate around the relief package, particularly with Progressives and those on the left of the Democratic caucus is the long-time issue of an increase in the Federal minimum wage, which for nearly a decade now has stood at $7.25. This has been the longest tenure without an increase in the Federal minimum wage. 

 

However, many individual States have raised minimum wage to higher levels than the Federal level, while others have left it largely unchanged, allowing the wage level for tipped workers to fall to a meagre $2.13. The ‘Raise the Wage Act of 2021’ would see the Federal minimum wage set at $15 an hour by 2025, and crucially, have it indexed against median wages.

 

Doing so will protect it against possible erosion or devaluation. The act would also see the protection of these new wage levels and the phasing out of the deficient sub-minimum wages in all industries. 

 

The Congressional Budget Office (CBO), a non-partisan agency, reported their highly anticipated cost assessments, that the minimum wage increase would lift nearly 900,000 out of poverty by 2025, though it further assessed that it possibly could price nearly 1.4 million out of employment along with increasing the Federal deficit by $54 billion over 10 years from 2021 to 2031. It is largely on the two latter impacts that the socio-political consequences are massive, and one that goes right to the heart of the economic field.

 

 

If there is any one thing to learn from any Economics 101 class, it is the economic theory that if prices go up, demand must go down. This same idea is applied to labour economics and how wages work. If a worker’s price for labour per hour goes up, theoretically, the number of similar workers must go down, i.e., they would be forced or priced out of unemployment.

 

This is largely the theoretical basis of how the minimum wage might work, that by making low-wage workers more expensive, you might cost them out of a job, essentially hurting the people you want to help. 

 

For a very long time this was largely how economists viewed the effects of the minimum wage. Though in the last 30 years, many academic studies have come to somewhat turn this theory on its head, most notably a study done by Alan Krueger and David Card in 1994. Card and Krueger studied how a minimum wage increase affected fast-food restaurant workers along the New Jersey-Pennsylvania state border.

 

The reason why this study is special is because New Jersey experienced an increase in the minimum wage from $4.25-$5.05, while Pennsylvania’s minimum wage level stayed the same Therefore, they could study any effects in perfect comparison between the two States. Using various econometric tools.  

 

They found that there were no effects on employment when the minimum wage increased in New Jersey. They concluded that an increase of the minimum wage did not affect employment for low waged workers, if the increase was staged over a median period time allowing for businesses to adapt to the change.

 

Card and Krueger’s paper was a seminal study as it changed the academic and political debate around the minimum wage. Over the years there have been many similar studies that arrived at similar conclusions, a marginal to null effect on employment levels.

 

The Economic Policy Institute (EPI), which was set up in 1986, produces many academic papers around many topics, but partially specialises in minimum wage policy and advocacy.

 

Even before President Biden campaigned on making the minimum wage $15, the EPI had been calling for the practical increase with various congressional hearings and academic studies taking issue with the effects on employment and the economic health at large. 

 

 

In a 2019 paper, done by David Cooper, a senior economic analyst at the EPI, he concluded that raising the minimum wage to $15 by 2024, could benefit a total of 37.5 million workers, with a direct wage rise for 28.1 million workers.

 

This annual income of full-time workers would see their income increase by $3,900 or equivalent to 20.9% pay rise. In a response to the partial critical CBO’s report of the ‘Raise the Wage Act of 2021’ and using their data, Cooper, and other EPI analysts, concluded on-top of their previous beneficial assumptions, that the Act would lead to a 10-year increase of wages of the magnitude around $330 billion for low wage workforce.

 

 

Though the EPI did disagree on the CBOs forecasts of a large job loss due to the said increase, stating the job losses number is somewhat over exaggerated and focused too much on the finance side of the technicalities especially that the price increase would be a marginal one, in the bigger picture.

 

Despite the disagreement around the issues of possible employment effects, both the CBO and the EPI agree that the minimum wage is an excellent economic tool in fighting income inequality, a problem in America which in many respects, has been neglected for far too long. 

 

 

The minimum wage is not the panacea to inequality and poverty, but it is certainly a useful tool or step in the right direction and one in which in other parts of the world, is not that controversial. In England, even though the minimum wage was introduced by a Labour party government, the Conservative Tory party made reasonable increases to it, when they went into government.

 

Despite the conventional theory of Econ101 that the impact of a minimum wage on employment results in job loss, the many papers and studies seem to prove the theory false in its claim. Most of these studies point too little to no effect in employment because of a minimum wage increase or its introduction if it were staged and therefore employers could plan to incorporate that change. 

 

The only thing that did change was that low waged employees, majority of them women, ethnic minorities and low skill immigrants now have a higher take home pay and a higher incentive to work. If that means that as consumers, we must endure a burden of marginal increase in our next fast-food meal by mere penny’s so that minimum wage workers can enjoy a higher economic position, then so be it. 


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