What Are the Pros and Cons of Raising the Minimum Wage?

The debate over raising the federal minimum wage level continues on in 2016, with some proposals pegging the suggested minimum at $10 an hour, and others aiming substantially higher at $15 an hour, a level that has already been implemented by the city of Seattle. There are not strong arguments both for and against an increase, and the arguments regarding the pros and cons of raising the minimum wage appear to get more heated as the suggested minimum wage level rises.

According to an analysis conducted by Aaron Pacitti, an assistant professor of economics at Siena College, the current federal minimum wage of $7.25 an hour, adjusted for inflation, matches its level in 1956, and the minimum wage hit its peak adjusted for inflation level as far back as 1968, when it was the equivalent of $10.89 an hour in today's dollars. If the minimum wage had increased from that point forward, keeping pace with inflation, it would be around $16 an hour in 2016, higher than most anyone proposes to elevate it.

The primary argument advanced in favor of raising the minimum wage is that it would improve the overall standard of living for minimum wage workers by providing them with a more appropriate income level to handle cost of living increases. A 2013 Congressional Budget Office (CBO) report projected significant standard of living benefits for 16-17 million workers, assuming a minimum hourly wage of $10.10, including an estimated 900,000 people being elevated above the poverty line. Some proponents of raising the minimum wage estimate a much larger number of individuals and families escaping poverty. A related potential benefit is a projected reduction in the need for federal and state government expenditures on financial aid for poor and low-income individuals.

An intangible benefit that could translate into tangible benefits for both companies and employees is improved employee morale resulting from higher wages. Business owners frequently note the challenge of providing sufficient encouragement to spur workers to put maximum effort into their job duties, and that this is particularly problematic with low-wage workers who feel that their efforts aren't even managing to keep them out of poverty. Increasing employee morale could easily translate into more tangible benefits, such as increased employee retention and reduced hiring and training costs. Employees who are more inclined to stay with a company longer could benefit from greater advancement, and from an overall reduction in job-related relocation expenses.

A boost to economic growth is another potential advantage of increasing the minimum wage, as consumer spending typically increases with increases in wages. A higher minimum wage would put more discretionary dollars in the pockets of millions of workers, money that would then flow to retailers and other businesses.

Among the disadvantages of increasing the minimum wage is the probable consequence of businesses increasing prices, thus fueling inflation. Opponents of an increase argue that raising the minimum wage would likely result in wages and salaries increasing across the board, thereby substantially increasing operating expenses for companies that would then increase the prices of products and services to cover their increased labor costs. Increased prices mean a general increase in the cost of living that could essentially negate any advantage gained by workers having more dollars in their pockets.

Another projected problem resulting from an increased minimum wage is that of potential job losses. Many economists and business executives who point out that labor is a major cost of doing business argue that businesses will be forced to cut jobs to maintain profitability. The 2013 CBO report estimates that raising the minimum wage to $10.10 an hour would result in the loss of approximately 500,000 jobs. The numbers could be substantially higher if companies made a major move toward outsourcing more jobs to less expensive labor markets outside the country.

One potential negative impact that is less readily apparent is the possibility that a higher minimum wage would result in increased labor market competition for minimum wage jobs. The net outcome of an increased minimum wage might be a large number of overqualified workers taking minimum wage positions that would ordinarily go to young or otherwise inexperienced workers. This could impede younger, less experienced entrants to the job market from obtaining work and gaining experience to move their careers forward.