Everything Wrong with the American Minimum Wage

With unemployment spiking around the world in recent years, it is time to put the debate on minimum wage back into the spotlight. The minimum wage is the lowest wage permitted by the government to improve the standard of living for lower-income workers; unemployment is usually defined as a situation in which an individual of working age who is actively

searching for a job is unable to find one. In the United States, the issue of its unemployment and poverty rate can be mostly credited to its poor minimum wage policies. The ineffectiveness of the American federal minimum wage not only decreases its international economic competitiveness, but also its domestic economic strength during the crisis. The US government should raise the minimum wage, and maintain its effectiveness by periodically altering its value according to currency inflation.

Poverty has always been a problem for all nations, including the US. Among all OECD, the US has the fourth-highest poverty rate at 17.8%.(WorldPopulationReview) The United States spends a budget to tackle the issue directly through welfare programs, and a significantly poor population can be a burden to the economy. As the world becomes more globalized and open for international trade, the workers of capital-abundant nations like the United States are facing unprecedented long-term unemployment threats and decreasing wages. According to the Stolper-Samuelson theory, capital-abundant countries not only face a shortage of capital for advanced goods and services, but also causes a surplus of labor, which results in lower wages and unemployment. Bipartisanship further escalates, as the decision to adopt policies of protectionism is made possible by Congress. But when in times of need for domestic economic power to overtake international businesses in times of crisis, the US would not have time to recover its market, causing major dissatisfaction from the public and economic downfall, as evident during the Covid years.

Nations maintain minimum wages to ensure domestic economic growth, maximize productivity, and reduce poverty. Such an important policy in the domestic economy undoubtedly should be maintained and constantly fixed with currency values, especially in the age of globalization, in order to compete with international businesses. However, since the establishment of the Fair Labor Standards Act in 1938, which was enacted under the authority of Congress from the constitution(LII), the federal minimum wage of the US only increased (in dollars) gradually, and have been showing a negative trend throughout the years as shown in the graph from the CWED of UC Berkeley. The fundamental problem with the federal minimum wage is its system: a highly bipartisan congressional authority dictating a number that would remain constant without new amendments to be passed. While the democrats gain their political support from young college graduates and urban workers, and the republicans secure their influence from conservatives and business owners, it is very difficult to maintain a stable minimum wage that corresponds with currency inflation.

When the Biden administration took office earlier this year, the goal to increase minimum wage can be promising for the American economy. The benefits from ensuring workers’ income outweigh the costs, as raising the minimum wage can be essential to ensure the strength of the domestic economy.

Firstly, raising the wages of employees encourages markets to grow. In the famous study conducted by David Card and Alan Krueger from Princeton University, statistics show that a business in a state with a higher minimum wage increased employment. This means that an increase in the minimum wage can increase economic activity and growth(Card, Krueger). If the minimum wage can successfully increase household earnings, then it would stimulate consumer spending. An increase in consumer spending directly leads to an increase in business profits, leaving more funds for business investment.

Secondly, as an immigrant nation, the economic atmosphere in the United States relies on culturally diverse working forces. Economist Ellora Derenoncourt and Claire Montialoux argued in their article that an extension on a minimum wage like the one in 1967 can be responsible for “20% of the reduction in the racial earnings and income gap during the civil rights era.”(Derenoncourt, Montialoux) By eliminating racial discrimination within the domestic market, the US economy can benefit drastically and become more competitive in terms of production and consumption internationally. As a result, setting up a minimum wage

can ensure American domestic businesses expand, and compete with international businesses which can affect the balance of capital and labor.

Granted, raising the minimum wage too high can backfire by indirectly forcing businesses to lay off workers to reduce the increased cost, causing unemployment. But the federal minimum wage in the US is far too low for the states to receive benefits. Using the example of the housing industry, between 2010 to 2020, the average apartment rental price increased around 40% according to researchers from the National Low Income Housing Coalition(NLIHC.org), and the minimum wage increased by 0%. This proves how the minimum wage of the US is not balanced with its domestic market. If the minimum wage is raised accordingly, local businesses can increase their growth from local consumers and compete with larger international corporations. Thus, the first step to strengthen the American economic position in the international market and stabilize domestic economic growth in times of crisis is to increase the minimum wage.

The most important step for the US to secure its international economic competitiveness and domestic economic stability is to establish a system for a flexible minimum wage that differs periodically according to markets and currencies. This can not be achieved if Congress still sees the decisions on changing the values of national income insurance as a simple debate of yes or no. The minimum wage needs to be supervised with up-to-date data analysis, and investigations on both the circumstances of low-income employees and business owners have to be periodically conducted by professionals.

Most countries around the world already have more reliable systems to balance currency inflations and minimum wage consecutively. In Canada, all states are required to review their minimum wage values annually. Although there are no strict requirements for minimum wages to be changed immediately upon changes in currency values, Canada’s overall minimum wages have been stable and steadily increasing according to currency inflations. The Netherlands even calculates minimum wage values daily. The economies of these nations are not as powerful as the US due to their limited resources and technological advancements, but the US does not have the ability that most developed nations have to tackle crises and resolve domestic economic issues. The US Congress needs to standardize domestic economic investigations through means that avoid political conflicts.

One way to achieve this is for the White House or Congress to call for a new organization to be formed. This organization should work collaboratively with or under the Department of Labour and similar agencies. Weekly or monthly data collection and analysis should be conducted for bi-annual reports that suggest the effectiveness of the current minimum wage so that Congress can understand the necessity for minimum wages to be changed. Congress, as one of the major structures of the federal government, should focus on other matters instead of bi-annual debates on the minimum wage. Therefore, Congress should have the authority to supervise or terminate decisions made by the organization, instead of taking every responsibility.

Works Cited

Derenoncourt, Ellora, and Claire Montialoux. “Minimum Wages and Racial Inequality*.” The Quarterly Journal of Economics, vol. 136, no. 1, 2020, pp. 169–228., doi:10.1093/qje/qjaa031.

Reich, Michael, et al. Center of Wage and Employment Dynamics, 2019, The Employment Ef ects of a $15 Minimum Wage in the U.S. and in Mississippi: A Simulation Approach .

Aurand, Andrew, et al. “Out of Reach 2020.” Out of Reach , National Low Income Housing Institution, 19 May 2020, reports.nlihc.org/oor.

Card, David, and Alan B. Krueger. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania.” <i>The American Economic Review</i>, vol. 84, no. 4, 1994, pp. 772–793. <i>JSTOR</i>, www.jstor.org/stable/2118030. Accessed 11 Aug. 2021.

Campbell, Alexia Fernández. “The House Just Passed a $15 Minimum Wage. It Would Be the First Increase in a Decade.” Vox, Vox, 18 July 2019,

www.vox.com/2019/7/18/20697509/minimum-wage-bill-raise-the-wage-act.

“History of Federal Minimum Wage Rates Under the Fair Labor Standards Act, 1938 - 2009.” United States Department of Labor, www.dol.gov/agencies/whd/minimum-wage/history/chart.

“Minimum Wage.” Legal Information Institute, Legal Information Institute,

www.law.cornell.edu/wex/minimum_wage.

“Poverty and Spending Over the Years.” Federal Safety Net,

federalsafetynet.com/poverty-and-spending-over-the-years.html.

“Poverty Headcount Ratio at National Poverty Lines (% of Population) - Colombia.” Data, data.worldbank.org/indicator/SI.POV.NAHC.

Poverty Rate By Country 2021,

worldpopulationreview.com/country-rankings/poverty-rate-by-country.

---

Photo by NeONBRAND on Unsplash

To read more articles from Haozhen Xu click here