Issues With the Minimum Wage
President Franklin Roosevelt signed into law the Fair Standards Labor Act in 1938 setting the minimum wage at 25 cents per hour. In 2009 dollars, that is equal to $3.77. Since then, a debate has been ongoing over whether the federal government should meddle in setting a minimum wage and whether the act fouled the hiring practices of businesses.
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The Crux of the Debate
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The basic neoclassical school of thought maintains that that a minimum wage set above a naturally market-set or equilibrium wage in a market creates a surplus of labor and creates unemployment. The problem with a strict interpretation of this model is that the marketplace isn't perfect. It assumes a “one-sector” market, perfect competition, perfect employee mobility, equal bargaining powers between employers and employees and a host of other assumptions. The classical response to the neoclassical model has been that without a minimum wage, a business isn't going to pay $5.15 or $7 to an adult unskilled factory worker when it can pay half either amount to an unskilled high school student, pitting students who are looking for supplemental income against those seeking to support a family. For two, workers need a minimum amount of income to pay their bills. Lastly, left unchecked, businesses will pay as little as possible to maximize profits which, in part, gave rise to the the labor union movement.
Studies Show Mixed Results
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Seventy years of study have provided mixed opinions on the impact of minimum wages on the marketplace. Most studies from the left of the political ideological spectrum support the need for minimum wages based on both statistical and humanitarian grounds. Studies commissioned by those on the right side of the political spectrum tend to be pro-business, particularly when small businesses that live on the edge of economic success or failure are involved. A 1995 study commissioned by the Joint Economic Committee of the U.S. House and Senate cites more than 120 studies of competing viewpoints dating to George Stigler's review of the "Economics of Minimum Wage Legislation" published in 1947 to a 1994 study by David Card and Alan B. Krueger on "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," published in the American Economic Review.
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Politics and Constituencies
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The Fair Labor Standards Act moved the discourse over the effects of minimum wages from strictly the theoretical realm into the political arena. In politics, the arguments among conservatives follow the neoclassical argument while politicians with more liberal constituencies, minorities and Democrats, tend to argue the fairness issue.
A New Consensus
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What most recent research has concluded is that the minimum wage has a modest effect on employment, particularly among teen workers and may even have a positive effect for certain older workers seeking to supplement their pensions. Even the mainstream authority The Economist wrote in its Oct. 26, 2006, issue that “Today’s consensus, insofar as there is one, seems to be that raising minimum wages has minor negative effects at worst.”
The Debate Isn't Over
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As long as there are politics, there are politicians and the minimum wage and at what rate it should be set will continue to be a matter of debate, regardless of the findings of the most respected economists on both sides of the issue. All states are bound to follow the federally set minimum wage, though some, such as Washington and California, have opted for higher minimum wages than the federal rate. Still others have established rates that are tied to annual cost of living increases.
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References
- Photo Credit top of the chart image by Steve Johnson from Fotolia.com
