Why a $15 federal minimum wage?

A new initiative is proposed to raise the federal minimum wage to $15 with the goal of alleviating poverty by decreasing employee turnover. Photo by Karolina Grabowska from Pexels.

The outcome of the 2020 U.S. presidential election is official and regardless of political party affiliation, it is time to come together as Americans for the improvement of the country. To address some of the most pressing issues surrounding the pandemic’s exacerbation of existing domestic poverty issues, President Joe Biden proposed a bold initiative to incrementally raise the federal minimum wage to $15. This action will additionally provide emergency paid leave and restore vital collective bargaining rights and protections to employees. Ideally, the administration believes federal employment standards will serve as a model and precursor to gradually alter state stances on employment compensation and worker benefits. Increasing the minimum wage is essential because it would alleviate poverty by decreasing employee turnover without increasing unemployment, stimulate consumer demand via increasing purchasing power, disincentivize monopolistic exploitation and create developmental investment opportunities in low-income communities. 

The House Committee on Education and Labor asserts that 80% of big business executives and 60% of small businesses support significant minimum wage increases and indexing it for inflation because workers that earn a higher minimum wage are more productive, healthier and have lower turnover. Trusted employees are the backbone of businesses, especially smaller ones.  Investing in them only helps local businesses as it increases the number of transactions between consumers and sellers. Furthermore, an analysis by the Center for American Progress estimates the cost of replacing low-wage workers is equal to about 16%  of the employee’s annual salary. Consequently, reducing the turnover rate would increase cumulative small business savings by 16% with the savings rate rising when retaining higher paid employees. 

The statistics show this benefit from decreased employee turnover also comes with no increase in unemployment because the cost shock from a minimum wage increase is marginal compared to other variable costs most firms incur. Markets in the real world are classified as being imperfect which means that modeling metrics that track wage increases correlations with unemployment in a vacuum are not accurate depictions of real-world outcomes. San Francisco implemented a $15 minimum wage in July 2018 and found the unemployment rate dropped by 0.6% by May of 2019 with no signs of slowing down. Lastly, The Economic Policy Institute (2019), in what has been deemed the most comprehensive metastudy on the impacts of a significant minimum wage increase, examined the effects of 138 state minimum wage changes that occurred in the United States between 1979 and 2014. They found that “even with minimum wages rising as high as 55 percent of the median wage, there was no evidence of any reduction in the total number of jobs for low-wage workers”. The researchers specifically analyzed impacts on workers without a college degree, underrepresented minorities and other stratified groups that struggle more to find work and found no evidence of substantial losses in jobs or reductions in hirings. An increase in the minimum wage to increase financial security for the most vulnerable populations allows them to afford self-investment services such as better education opportunities to break generational cycles of poverty.  

The goal of the minimum wage is to ensure all forms of full-time employment suffice for a state’s cost of living. Because the minimum wage, both federally and statewide, have not adequately accounted for inflation, consumer purchasing power has decreased significantly in the low-income sector. This impact is especially blatant in income polarized parts of the country like Connecticut which ranks as the ninth most expensive state to live in and has the fourth worst income inequality in the country. One key indicator of relative poverty in a community is the amount of purchasing power the average residents have. 

President Joe Biden signs a series of executive orders on health care, in the Oval Office of the White House, Thursday, Jan. 28, 2021, in Washington. The Democratic push to raise the minimum wage to $15 an hour has emerged as an early flash point in the push for a $1.9 trillion COVID relief package, providing an early test of President Joe Biden’s ability to bridge Washington’s partisan divide in pursuing his first major legislative victory. (AP Photo/Evan Vucci)

Consumer purchasing power is a metric that measures an individual’s buying capacity. Their capacity to buy affects their propensity to buy which affects aggregate demand in a phenomenon known as consumption smoothing. A higher minimum wage allows for people to have the capital to purchase necessities, invest in recreational activities that bolster the local economy and embark on entrepreneurial ventures themselves. Additionally, people of color and women are paid the vast majority of wages below fifteen dollars an hour. Raising the minimum wage would positively impact 25% of Black workers and 19.1% of Hispanic workers in comparison to 13.1% of White workers and 10.8% of Asian workers, which would reduce suburban gentrification and racially integrate communities. A more financially stable middle class will also make communities more attractive for investors to spur an inflow of capital. It is critical that the country is able to provide livable wages. 

Between 2010 and 2020, the price for housing increased by 40% while the minimum wage has remained stagnant and actually depreciated in value with regards to inflation and percentage share of labor productivity. The prices of housing are increasing irrespective of the minimum wage which means it is essential to raise the minimum wage to ensure that people in low-income communities can afford necessities and have some level of purchasing power. In regards to food, the country of Denmark pays McDonald’s workers $22 per hour, gives them 6 weeks of paid vacation, maternity leave and a pension plan while maintaining their bottom line selling burgers that costs on average 27 cents more than those in America. Other countries such as France and Australia already alter their minimum wages annually to account for inflation and worker productivity. Between the U.S. government spending more than $1 trillion annually on the military and large corporations such as Amazon and Walmart growing nearly $116 billion richer during the pandemic alone, there is more than enough money to pay minimum wage workers a non-poverty wage that will only supplement local economies. The Economic Policy Institute states that their studies show minimum wage workers spend a much larger share of their income into local businesses, and a wage increase would beget a positive impact on GDP. Opponents of raising the minimum wage cite how small family run businesses would struggle if they were forced to pay a $15 dollar minimum wage, but should a business that can’t function without paying borderline slave wages be running? Based on free market logic, businesses should not conduct operations if they are only economically viable because of exploiting their labor inputs. The only people that benefit from paying substandard wages are the owners and corporate elite who are becoming richer every year. Companies like Uber do not even classify their workers as employees. The American mentality of working harder to get rich is now a fallacy. The economy has changed and the minimum wage should too.  

Raising the minimum wage to a simply livable level also increases the bargaining power of employees so that they can secure better paying jobs with increased employee benefits via reducing the monopolistic leverage of employers. A monopsony is defined as a market situation where labor is funneled into one primary employer. This limits the options of workers and suppresses their negotiating leverage in favor of the owner class, frequently resulting in market failure. Market failure makes an area less economically productive which has a direct impact on poverty rates, local standard of living and community real estate value. Many opponents of minimum wage increase argue commodity prices will increase if minimum wage increases,  negating any potential benefit to impoverished people. However, this claim is proven baseless by the Upjohn institute of employment research who identified that during the period of 1978–2015, prices rose by just 0.36 percent for every 10 percent increase in the minimum wage, which is only about half the size reported in previous studies. They also find increases in minimum wage to not always beget higher prices and may actually reduce them. A healthy competitive market that a higher minimum wage creates, with people that are more likely to spend and more skilled as a result of having savings, is one that presents itself as a more enticing opportunity for venture capitalists. According to a 2018 Berkley study, higher minimum wages in retail not only resulted in increased profits with an average output surplus of over 23% for local businesses but also found that employees accumulated 8-10% more wealth than they would have otherwise within a 5-year span. Local businesses were directly correlated to appreciating in value significantly.  

A federal minimum wage of $15 per hour would benefit local communities by creating a multiplier effect that benefits local businesses and raises the value of real estate. Increasing the number of transactions between consumers and personal investment facilities such as schools, workshops and other venues makes a location more attractive for external investment. Consequently, not paying workers adequately has a negative ripple effect as they become unable to pay rent, resulting in people vacating houses and being unable to pay for essentials like groceries. This devalues a community as a potential market in the eyes of businesses looking to invest. Businesses look for healthy competitive markets with a consistent pool of buyers.  This economic multiplier effect, as a result of greater external investment potential, social capital benefits from increased aggregate wealth in impoverished communities and market balance achieved by a higher minimum wage bill and tackles the issue of poverty head-on by addressing it at the root cause, helping millions in more than justifying Biden’s minimum wage proposal. 

In reality, the minimum wage established by the Fair Labor Standards Act of 1938 should now be at $24 when factoring in inflation and increases in worker productivity. Implementing a $15 minimum wage is not only economically beneficial, but critical because people of all income stratifications matter.  

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