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The Minimum Wage Debate: To Raise Or Not To Raise

December 23, 2013 0 comments

by Lizzy Bale

two men fighting over moneyNobody wants to earn a minimum wage for the rest of their lives. A lot of the people getting compensated under this salary bracket are usually in poverty. They want to rise from a low income family to ultimately be a financial success.

Unfortunately, only a small percentage from low income households actually step up the income level. They find it hard to grab the opportunities that could help them earn more. A lot of them are resigned into thinking that they will forever be stuck in this salary range – relying on food stamps and other charitable organizations to get what they need to survive.

What is the current lowest salary in the US?

With the rising cost of living, President Obama revealed his intentions of raising the federal minimum wage in the country from $7.25 to $10.10. Some states have actually voted to increase the base pay in their state (New York, California, New Jersey, Rhode Island and Connecticut).

Based on data found on the Bureau of Labor Statistics, 3.6 million workers in 2012 are being paid a salary that is at or below the minimum income set by the federal government. Most of these workers are paid on an hourly basis. The breakdown of the minimum wage workers in 2012 are as follows:

  • 4.7% of the total number of American workers that are 16 years old and older are paid the base salary or lower.

  • 6% of all hourly paid female workers (16 years and older) are being paid the minimum compensation or lower.

  • 3.4% of all hourly paid male workers (16 years and older) are paid the minimum wage or lower.

  • 21.1% of 16-19 year-old hourly paid workers earn a minimum salary or less. Of all the women in this age bracket, 23% earn a base pay compared to 19% for men.

  • 8.7% of 20-24 year-old hourly paid workers also earn the minimum pay or less. Of all the working women of the same age range, 11.9% are paid wages that are at or below this rate compared to 5.5% for men.

Source: http://www.bls.gov/opub/ted/2013/ted_20130325.htm

The same site also revealed that the industry with the highest number of workers employed with a minimum wage is the Leisure and Hospitality industry. Restaurants and other food services fall under this industry. They are followed by Other Services and the Retail Trade.

Is it really helpful to raise the base pay?

Obviously, the percentage of minimum wage earners is small at 4.7%. But if you consider that this percentage represents 3.6 million workers – the figure becomes more significant. This means 3.6 workers are earning $7.25 an hour. With an 8 hours/day and 5 days/week work schedule, these workers get $58 a day, $290 a week and $1,160 a month (assuming 4 weeks per month). This is probably why a lot of people earning a base pay is choosing a second job to earn more money.

While it is evident that living on a base pay is not easy, the question about whether this limit is to be raised or not is subject for debate. Let us enumerate how this will affect all of us in general.

Businesses

First of all, the effect of a minimum wage hike will be felt initially by businesses. Both big and small companies will have to adjust their budgets to incorporate this increase. The money will have to be taken from somewhere. It can be taken from the benefits that are not mandated by the government. It can be taken from the overall profit of the employer and/or business. It can be taken from the layoffs that will free some of the budget from their income. It can also be taken from the funds that are meant to finance the expansion and growth of the company.

Employment conditions

The effect on the nation’s employment situation will depend on how the businesses will react. Obviously, the layoff will mean an increase in the unemployment rate. It will also mean the current unemployed will have a tougher chance at getting a job. With the higher wages, companies will not be too quick to hire more people. Not only that, they will be very strict in hiring people because they want to hire those whom they think are more qualified to earn the higher income. This will make it tougher for the youth coming out of low income households – especially those who are unable to afford a higher education.

National economy

In the end, the effect will be felt across the national economy. With businesses being forced to increase their payroll budget, one of the ways they will compensate for that is to increase their product or service prices. It will increase the cost of living further and that will not help the poverty issue that the minimum wage is trying to fix.

A study published through the Berkeley.edu site proved that there is an effect in the employment conditions right after a wage increase. The study was dated July 20, 2013 and is titled “Minimum Wage Shocks, Employment Flows and Labor Market Frictions” and was created by Arindrajit Dube, T. William Lester, and Michael Reich.

These are some of their findings:

  • The average weekly earnings of 2.2% of teenagers and 2.1% of restaurant workers will increase by 10%.

  • Turnover rate for a 10% minimum wage increase will decline by 2% for teenagers and 2.1% for restaurant workers.

  • Separations decrease for teenage workers (-0.233) and restaurant workers (-0.225).

  • Hiring also decrease in the same way as the separation elasticities.

As the minimum salary increases, teenagers and restaurant workers are more inclined to stay in their jobs but the businesses they are employed in will opt to decrease hiring. It could help the employed but it will do nothing for the unemployed.

The real solution to the minimum salary problem

With all of these data, one can wonder if the real solution is to increase the base pay of American workers. If you consider the whole picture, the increase may not strengthen the overall economy. It will help the individual workers but only before the cost of living rises once more.

In truth, a person or household living on minimum wages may benefit more from frugality than earning more income. Regardless of how much you are earning, you will be having a hard time living within your means if you continue to upgrade your lifestyle as society sees fit.

It is true that the cost of living is relatively high for people earning the minimum compensation, there are options to help them cope with their financial plight. Of course, food stamps and other federal benefits will help a great deal. However, credit will not. So as much as possible, stay away from credit card use to help finance your basic needs.

Other things that you can do is to get two jobs – or encourage a dual earning household. This is one of the ways that you can improve the quality of your life.

As for the government, instead of pursuing the minimum wage hike, they should focus more on giving workers the ability to aim higher than the minimum salary. For instance, work on making higher education more affordable. Instead of encouraging student loans, increase scholarship programs. This way, more people do not need to settle with minimum paying jobs.

Instead of increasing the pay, it is much better to just give the people the means to earn more. As the study shows, people are less hesitant to leave their work after being given a higher income. While the lower turnover will benefit the business, workers will not be encouraged to find ways to improve their working conditions by improving their skills or something similar. Improving skills, has more potential to solve the poverty problems. You do not have to ask employers to raise the base pay because they will be compelled to pay more for a higher quality workforce.

In the end, you do not only get a well compensated consumer, you also get a new generation of well educated workers.

Lizzy Bale
I am a freelance writer for DebtConsolidationUSA.com and I hope to share useful financial information to help people fight the good fight against debt.

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