The Cost of Raising the Minimum Wage
Ronald Shaffer
Siena Heights University
MGT 360
Introduction
The Federal Minimum Wage is increased with the best of intentions and those that will benefit from the increase in pay are always excited for the raise. There are some hidden costs for both employees as well as employers that are required to raise their wages. Increasing the minimum wage can cause job loss, increase the risk of debt, and result in a loss of benefits for lower wage workers along with raising prices in the market that can make overall living expenses higher than the wage increase they receive. This paper will take a look at how employees are impacted by raising the Federal Minimum Wage; specifically, how in many cases the wage increase can, arguably, harm rather than help them.
The Fair Labor Standards Act
The Fair Labor Standards Act or FLSA was enacted in 1938 by President Franklin D. Roosevelt. The act banned unfair child labor, set the minimum hourly wage to 25 cents, and set the maximum number of hours to be worked in a week at 44 hours (Grossman). The minimum hourly wage has grown over time to account for changes in inflation and, as of July 24, 2009, the current minimum wage is $7.25 per hour. When employees work more than 40 hours per week, the minimum is not less than one and one-half times the regular rate of pay. When enacted this bill was meant to stop some serious issues relating to how the workforce was being treated and not to ensure that a family of four could maintain a living while making minimum wage. Many of the jobs that pay the minimum wage require little to no education and less skill or ability than higher paying jobs. Also, under the FLSA, there are employees that are considered exempt and the FLSA guidelines do not apply to them. "An exempt employee is usually paid a salary and includes executive, professional, outside sales, and administration positions." (Dias, 2011). This means that if there is a lower level salaried employee working 55 hours per week and making $20,000 a year they would be making less than the minimum wage.
Job Loss
When businesses are forced to increase the amount they pay their employees they must find a way to recoup the additional cost in labor. A few of the fastest ways to are recover this cost is by cutting employee's hours and reducing the number of staff that they employ. Raising the minimum wage will assist some of the lower skilled workers in achieving a level above poverty, while other lower skilled workers will either see a significant reduction in their hours or lose their job entirely. This, in turn, will reduce their household income dropping them deeper into poverty (Sabia & Burkhauser, 2010). As the General Manager of a restaurant that employs a majority of minimum wage workers, I have had to implement these strategies with every wage increase that has occurred. My company has a desired labor percentage in order to remain profitable and the company does not raise that percentage in order to account for a wage increase. This, unfortunately, means that I must make tough decisions about whom the best employees are and determine those that are deserving of hours. The employees who do not make the cut are either dropped to part-time employees or become unemployed.
The Increased Risk of Debt
One of the biggest problems for those that have received minimum wage increases in the past is a large spike that results from newly acquired credit. In a study of previous wage increases there was a shocking finding that " a $1 minimum wage hike increases household income by roughly $250 and spending by approximately $700 per quarter in the year following a minimum wage hike." (Aaronson, Agarwal, & French, 2012). This increased spending results from the newly acquired credit that those persons became eligible for with the increase in wages. This trend continues for a few quarters past the initial enactment of the wage increase. Therefore, although these individuals received a boost in pay, they ended up further in debt. Further, the economy may see a temporary boost from the spending that occurs with higher wages; but, the end result can easily be detrimental for those that needed the pay raise.
To combat the increased risk of debt, I believe it would be helpful if companies distributed literature to the employees who will be affected by a wage increase to help them become aware of the pitfalls that could occur if they take full advantage of, or take for granted, their newly acquired credit. This step would give some of those individuals, some whom might be qualifying for credit for the first time, much needed information on true repayment costs, credit scores, and budgeting so that they might be able to avoid large sums of debt.
Loss of Benefits
Minimum wage employees frequently receive part of their compensation from fringe benefits like training opportunities, insurance programs, child care, accommodating work schedules, and paid vacations. Unfortunately, after a wage increase these fringe benefits may be reduced or taken away entirely causing employees more cost than the wage increase is worth. (Lee, 2014). A reduction or depletion of benefits like insurance programs and child care can cost these individuals thousands of dollars each year while a raise of $1 an hour for a full-time worker will only add a little over $2,000 each year in gross income. If a minimum wage employee losses their flexible work schedule they may not be able to continue working or losing paid vacations will cost them valuable time with their families. Training opportunities allow employees to advance within an organization and assists in developing necessary skills to better themselves as workers and further their careers. With each of these reductions or losses in benefits, the employee will pay a greater price than the wage increase will compensate for.
Raising Prices
Another way that businesses can recover the extra costs that come with a wage increase is to raise the prices of the goods and services that they sell or produce. This is a very common practice due to the fact that the financial results are seen immediately. The main problem with this outcome is that if the price of a large amount of goods rise, the increase in wages can mean less for those receiving it. David Bradley stated "If minimum wage increases result in an increase in the aggregate price level, then the inflationary effects would erode some of the purchasing power of both those receiving raises and everyone else in the economy." (2013) While the increase in costs will mean less to customers that make more money, it will have a much greater effect on those making minimum wage.
Conclusion
Although a minimum wage is necessary in order to ensure that employees are receiving a fair wage for the work that they do, raising this wage comes with potentially serious consequences for those that the wage increase is intended to help. A study that used the March 2008 statistics by a Canadian Labour Force Survey, found that roughly 30% of the net gains from a minimum wage increase would go to those considered in poverty and instead 70% would end up as net earnings gains by those that were not. (Campolieti, Gunderson, & Lee, 2012). If there is a desire to truly help employees that make minimum wage there appears as if there must be some alternatives such as, tax incentives that would give them increased monetary power or even tuition assistance or skills training that would allow them to further their education and find higher paying jobs.
Ronald Shaffer
Siena Heights University
MGT 360
Introduction
The Federal Minimum Wage is increased with the best of intentions and those that will benefit from the increase in pay are always excited for the raise. There are some hidden costs for both employees as well as employers that are required to raise their wages. Increasing the minimum wage can cause job loss, increase the risk of debt, and result in a loss of benefits for lower wage workers along with raising prices in the market that can make overall living expenses higher than the wage increase they receive. This paper will take a look at how employees are impacted by raising the Federal Minimum Wage; specifically, how in many cases the wage increase can, arguably, harm rather than help them.
The Fair Labor Standards Act
The Fair Labor Standards Act or FLSA was enacted in 1938 by President Franklin D. Roosevelt. The act banned unfair child labor, set the minimum hourly wage to 25 cents, and set the maximum number of hours to be worked in a week at 44 hours (Grossman). The minimum hourly wage has grown over time to account for changes in inflation and, as of July 24, 2009, the current minimum wage is $7.25 per hour. When employees work more than 40 hours per week, the minimum is not less than one and one-half times the regular rate of pay. When enacted this bill was meant to stop some serious issues relating to how the workforce was being treated and not to ensure that a family of four could maintain a living while making minimum wage. Many of the jobs that pay the minimum wage require little to no education and less skill or ability than higher paying jobs. Also, under the FLSA, there are employees that are considered exempt and the FLSA guidelines do not apply to them. "An exempt employee is usually paid a salary and includes executive, professional, outside sales, and administration positions." (Dias, 2011). This means that if there is a lower level salaried employee working 55 hours per week and making $20,000 a year they would be making less than the minimum wage.
Job Loss
When businesses are forced to increase the amount they pay their employees they must find a way to recoup the additional cost in labor. A few of the fastest ways to are recover this cost is by cutting employee's hours and reducing the number of staff that they employ. Raising the minimum wage will assist some of the lower skilled workers in achieving a level above poverty, while other lower skilled workers will either see a significant reduction in their hours or lose their job entirely. This, in turn, will reduce their household income dropping them deeper into poverty (Sabia & Burkhauser, 2010). As the General Manager of a restaurant that employs a majority of minimum wage workers, I have had to implement these strategies with every wage increase that has occurred. My company has a desired labor percentage in order to remain profitable and the company does not raise that percentage in order to account for a wage increase. This, unfortunately, means that I must make tough decisions about whom the best employees are and determine those that are deserving of hours. The employees who do not make the cut are either dropped to part-time employees or become unemployed.
The Increased Risk of Debt
One of the biggest problems for those that have received minimum wage increases in the past is a large spike that results from newly acquired credit. In a study of previous wage increases there was a shocking finding that " a $1 minimum wage hike increases household income by roughly $250 and spending by approximately $700 per quarter in the year following a minimum wage hike." (Aaronson, Agarwal, & French, 2012). This increased spending results from the newly acquired credit that those persons became eligible for with the increase in wages. This trend continues for a few quarters past the initial enactment of the wage increase. Therefore, although these individuals received a boost in pay, they ended up further in debt. Further, the economy may see a temporary boost from the spending that occurs with higher wages; but, the end result can easily be detrimental for those that needed the pay raise.
To combat the increased risk of debt, I believe it would be helpful if companies distributed literature to the employees who will be affected by a wage increase to help them become aware of the pitfalls that could occur if they take full advantage of, or take for granted, their newly acquired credit. This step would give some of those individuals, some whom might be qualifying for credit for the first time, much needed information on true repayment costs, credit scores, and budgeting so that they might be able to avoid large sums of debt.
Loss of Benefits
Minimum wage employees frequently receive part of their compensation from fringe benefits like training opportunities, insurance programs, child care, accommodating work schedules, and paid vacations. Unfortunately, after a wage increase these fringe benefits may be reduced or taken away entirely causing employees more cost than the wage increase is worth. (Lee, 2014). A reduction or depletion of benefits like insurance programs and child care can cost these individuals thousands of dollars each year while a raise of $1 an hour for a full-time worker will only add a little over $2,000 each year in gross income. If a minimum wage employee losses their flexible work schedule they may not be able to continue working or losing paid vacations will cost them valuable time with their families. Training opportunities allow employees to advance within an organization and assists in developing necessary skills to better themselves as workers and further their careers. With each of these reductions or losses in benefits, the employee will pay a greater price than the wage increase will compensate for.
Raising Prices
Another way that businesses can recover the extra costs that come with a wage increase is to raise the prices of the goods and services that they sell or produce. This is a very common practice due to the fact that the financial results are seen immediately. The main problem with this outcome is that if the price of a large amount of goods rise, the increase in wages can mean less for those receiving it. David Bradley stated "If minimum wage increases result in an increase in the aggregate price level, then the inflationary effects would erode some of the purchasing power of both those receiving raises and everyone else in the economy." (2013) While the increase in costs will mean less to customers that make more money, it will have a much greater effect on those making minimum wage.
Conclusion
Although a minimum wage is necessary in order to ensure that employees are receiving a fair wage for the work that they do, raising this wage comes with potentially serious consequences for those that the wage increase is intended to help. A study that used the March 2008 statistics by a Canadian Labour Force Survey, found that roughly 30% of the net gains from a minimum wage increase would go to those considered in poverty and instead 70% would end up as net earnings gains by those that were not. (Campolieti, Gunderson, & Lee, 2012). If there is a desire to truly help employees that make minimum wage there appears as if there must be some alternatives such as, tax incentives that would give them increased monetary power or even tuition assistance or skills training that would allow them to further their education and find higher paying jobs.