The federally established minimum wage attempts to create favorable employment dynamics for both employers and employees. In the United States, 78.2 million workers are paid at hourly rates. Of these workers, 2.6 million are paid at the federal minimum wage, which equates to about 3.3% of hourly workers (Bureau Characteristics). Minimum wage workers tend to be young, with about 45% of all minimum wage workers being under the age of 25 (DeSilver). Of all industries, the food-service industry employs the most minimum wage workers, with about 58% of all minimum wage workers working in this industry (BLS Characteristics). The last increase of the federal minimum wage occurred in 2009, when it was increased to $7.25, which is where it remains today. There has been an overwhelming trend in the last 10 years for states to establish their own state minimum wages, based on the cost of living for that area (Dube). The simple supply and demand model for understanding the low wage labor market would tend to agree more towards the Conservative view, that the more the minimum wage is raised, the more job loss we can expect. However, a different perspective called the dynamic monopsony model, claims that paying low-wage workers a little more would improve worker retention and efficiency (Dube).
When debating over the minimum wage, or more specifically increasing it, it is critical to consider what raising the minimum wage will do to unemployment. The extent of job loss that accompanies increasing the minimum wage, depends how far the wage is set above equilibrium and the elasticity of labor demand for that specific industry (Schiller). As stated before, the minimum wage is set above the equilibrium wage, and each state will have its own equilibrium wage because it is determined by the cost of living. The cost to live in San Francisco, CA is far different than the price in Topeka, Kansas. The data that will be analyzed in this paper will be collected from two states, California and Kansas, which represent a state with a high cost of living and a state with a low cost of living and their respectable minimum wages.
The state of California has been especially proactive in the minimum wage revolution compared to other states. In January of 2017, California raised its’ state minimum wage to $10.50 per hour for employers of at least 26 employees (Bureau). The support for increasing the minimum wage in California was due to the success that the state had seen in years prior when the minimum wage was increased above the federal minimum. In 2008, the federal minimum wage was $6.55, but California made it’s own state minimum at $8.00. That same year, the cost of living index ranked California as the 5th most expensive state to live in with a rank of 114 (Cost). When that is compared to the price index of Kansas in 2008, who had the lowest state minimum wage in the country of $2.65 per hour, it is clear that different states have vastly different costs of living. In 2008, Kansas was the 12th cheapest state to live in with a cost of living index of 89 (Cost). According to Table 1, the Consumer Price Index for Urban Wage Earners and Clerical Workers in 2008, the annual average in San Francisco was 219.396. This can be compared to the annual average in Kansas as 193.066 in Table 2 (Bureau Characteristics). The difference in these indexes indicates that the costs of living vary considerably between states, which is a reason many states have adopted their own state minimums.
According to Pew Research, most Americans are now covered by higher minimums set by local state laws. There are 29 states, plus DC, that have set their own minimum based on a cost of living formula, and 12 of those states automatically adjust the state minimum annually based off that formula. When taking into account inflation, the federal minimum wage actually peaked in 1968. Since the minimum wage was last increased in 2009, it has lost about 9.6% of its purchasing power due to inflation (DeSilver). The federal minimum wage is an average of the cost of living of cities and towns all over the country, and the variability of these costs makes increasing the federal minimum wage such a heated debate. A worker earning $7.25/hour while living in Kansas will have a higher real wage than a worker earning that same salary in a state with a higher cost of living index. The federal minimum wage was last changed in 2009, but since then there have been a striking number of states that have set their own minimum wages based on the cost of living. When comparing the real wage differences between Kansas and California from 2008-2017, a minimum wage worker in Kansas’ real wage has actually fallen by 1.85% whereas a minimum wage worker in California’s real wage has increased by 3.67% after the minimum wage state increase (Bureau Characteristics). The highly variable cost of living makes it increasingly hard to make a federal minimum wage that will be fair to workers in all states.
Another important factor to consider when debating minimum wage legislation is how different industries and markets will react to the increase. The demand for labor has always been thought of to be fairly elastic, meaning that as the price of labor increased, employers would demand less labor. Additionally, if the firm was operating in an industry that is price elastic, the added costs would be pushed onto the customer (Filion). In the 1980’s, the elasticity of labor demand for all industries was found to be .1, meaning a 10% increase in the minimum wage would result in a 1% reduction in employment rate (Schiller). However, recent studies have estimated that the food-service industry’s labor demand to be almost inelastic (Dube). Changing the federal minimum wage could have dire consequences for businesses in one industry but have beneficial qualities to businesses in another industry, making the increase even more complex.
The dynamic monopsony model offers a different theory in which increasing the minimum wage can positively affect recruitment and retention of employees, thus increasing efficiency and production possibilities (Dube). This model can be implemented with firms in which labor supply is the binding factor. In other firms where labor demand is the binding factor, this model does not hold true, and those firms will either reduce employment or go out of business. The food-service industry is less elastic to changes in wage rates than other industries because they can make up the additional costs through increasing efficiency and reducing turnover (Dube). This is important to understand since the food-service industry employs the most minimum wage workers of any industry.
Another important element to consider with the minimum wage debate is how it relates to unemployment. According to Fig. 2, out of the top ten cities with the highest unemployment rate, eight were located in states with their own minimum wages of at least $10. Of the top ten cities with the lowest unemployment rates, four of them were in states that only a state minimum wage (Bureau Characteristics, Department of Labor). These statistics might indicate that cities with higher rates of unemployment are also the cities in which a higher state minimum wage is enforced, but it is not conclusive because other factors such as population, tax rates, and local economies must be taken into account.
In conclusion, the debate over the minimum wage has many more aspects than what may be first conceived. The minimum wage is a price floor that is set by the government that ensures all employees are paid a designated amount. Minimum workers tend to be young and over 66% work in the service-industry, more specifically the food-service industry (Bureau Characteristics). There has been an emerging trend in the last 5-10 years amongst states to enact their own state minimum wages based on the cost of living for the specific area they are in. The varying costs of living from city to city has caused a number of metropolitan areas like to create their own minimum wages, even above the state minimums (Minimum-wage.org)
There is also a high level of variability of the elasticity of labor demand between industries that makes a federal minimum wage increases arduous. If a firm is participating in an industry that is highly price elastic, the demand for labor might be more elastic as to not hand off higher costs on to customers. However, a firm in the food-service industry has less elasticity of labor because the increased wages paid to employees results in less turnover, higher production possibilities, and increased efficiency (Dube). The fluctuation of the elasticity of labor demand by industry complicates increasing the federal minimum wage because while some labor markets might benefit from a higher minimum wage, others will cause businesses to close to reduce employment.
To conclude, increasing the federal minimum wage is one of the most hotly debated topics in economics, and understandably so due to the complexity of the issue. Increasing the federal minimum wage is calculated based on the cost of living of that area, which is oscillate nation and city-wide. It also has differing effects on businesses depending on what industry they operate within, further complicating the issue. Changing the minimum wage will also influence local unemployment and inflation rates, making it one of the most perplexing issues that our country faces.
Based on analyzing the data in this paper and my experience of working as a minimum wage employee for several years, I believe it is in our best economic interests to not raise the federal minimum wage. Instead, I would advise states to formulate their own state minimum wages based on the cost of living for that area. I believe that increasing the federal minimum wage would have unfavorable outcomes for states with low cost of living indexes, and it should be left to state and local governments to decide a fair minimum wage since they know the most about their micro-economies. At the same time, increasing the federal minimum wage would not be beneficial to people who live in places where cost of living expenses are inflated, because many states and cities that have higher costs of living already enacted their own minimum wages. To put simply, increasing the federal minimum wage would hurt smaller towns and businesses while not doing enough for people who live in bigger cities, where a considerable proportion of minimum wage workers live.
I also believe in increasing state and local minimum wages instead of the federal minimum wage because of my work in the food-service industry as a minimum wage worker. I have seen first-hand how high turnover rates have business-wide effects. In my experiences, when a worker feels valued by a company, they will work harder and treat the business more like their own. One reason that turnover rates are so high in minimum wage positions is because the worker does not feel important, but rather replaceable. Paying a wage slightly above minimum is one way that employers can reduce turnover, and save time and money on training and hiring. To conclude, I believe increasing the minimum wage paid to the lowest tier workers can benefit both the employee and employer, but I believe policy change behind this issue should come at the state, local, or business-level.