Amidst economic woes trigged by the pandemic, the US minimum wage policy remains a perennial dilemma of vast socioeconomic implications. Given that inflation exists, an increase in wages is needed to compensate for the decrease in the purchasing power parity of consumers. However, the executive order issued by Biden in January 2021 to increase the federal minimum wage by a staggering amount of $7.25 to $15 dollars necessitated a discussion which has revealed numerous issues with the upcoming policy enactment. Though the livelihood of those with sustainable employment will improve, Biden’s federal minimum wage policy will cause devastating consequences to the U.S. economy upon the consideration of the adverse consequences regarding the unemployment level, business revenues, and income disparity.
First and foremost, Biden’s federal minimum wage policy will have dramatic repercussions on the job security of workers in the U.S., causing great concerns regarding the wellbeing of those involved. Empirical research over the last 70 or so years have revealed a consistent correlation between increases in the minimum wage and increases in unemployment (Wilson). The U.S. Department of Labor revealed that the 25-cent minimum wage enacted in 1938 caused 10 to 13 percent of those who had previously worked under the wage floor to lose their jobs. In Puerto Rico, over 120,000 workers lost their jobs – corresponding to a nearly 50 percent unemployment rate because of the new minimum wage (Rustici 107). Such prior policies reveal the inherent risks associated with the increasing of the federal minimum wage, with the possibility of numerous U.S. residents suffering losses in financial security and economic wellbeing. Though it is true that figures dating back to the 20th century may be outdated, the fact that the implementation of the 25-cent ($4.7 U.S. in 2023) minimum wage can cause such devastating effects strongly implies that doubling the minimum wage from $7.25 to $15 dollars will entail significant losses in the livelihoods of many in working class. Some policymakers and commonwealth believe that the costs associated with increasing the federal minimum wage are negated as companies inherently accept reduced profits. But this is not the case. In fact, companies act as rational entities who respond to such mandates by making decisions – most notably cutting employment – to maintain their net level of earnings. Thus, since private industries tend to offset the intended positive effects, Biden’s federal minimum wage policy will ultimately cause significant employment. This conclusion bolstered by a report issued by the Congressional Budget Office, which estimates that around 1 percent of the U.S. labor force will be displaced That figure refers to the equivalent of around 1.3 million workers losing their jobs (Alsalam 14). Needless to say, a decrease in the employment of such a massive number of workers is highly concerning issue, as the livelihood of them and their families will be lost. This means that the affected will be forced to endure severe financial hardship, poverty, debt, and even a tendency to turn to crime.
Even with the possibility of carrying over costs to customers, corporations will encounter substantial difficulties in the instance that the Biden federal minimum wage policy is legislated. From a transaction-based standpoint, a higher minimum wage places the employee and the employer at odds with each other as it creates needless acrimony (VandenBerg 85). This is observed as free market practices are overshadowed by legislation. Rather than having a mutual deal to determine the value that a worker brings to the corporation, the deal is largely one sided in that those who may be unqualified are still given a wage rate that exceeds that of the marginal revenue generated by the worker. As the relationship between an employer and his/her worker is tarnished, the productivity of both parties will ultimately fall, causing lower production value. This is of great concern as the salaries of workers tend to make up a large portion of the operational costs of small and medium sized enterprises, which means that low productivity leads to probable losses that can severely impact the financial health of such businesses. Research from the National Bureau of Economic Research details the adverse effect on small businesses. Small businesses located in more competitive counties, and those in low-income ZIP Codes find passing higher production costs to customers especially challenging. This leads to a decline in credit scores (Chava 31). Credit scores, which measure the payment history, industry risk, and debt among others, is extremely important for the continuation of businesses as it is a determining factor in the consideration of payment of both investors and consumers. Consequently, a decline in credit scores, induced by the significant growth in the minimum wage, will retard the sustainability of small businesses in the short term and long term. Furthermore, the negative impact of Biden’s federal minimum wage policy is more pronounced in industries which employ more minimum wage workers, including but not limited to restaurants and retailers (Chava 5). Spillover effects resulting from the impact of an increased minimum wage on other sectors may produce unforeseen consequences that can further harm businesses, one of which includes the likelihood of being forced to default.
Even though the median wage of those employed will rise, the opportunities for American youth and minorities to find employment will be put at greater risk, leading to a more inequitable income distribution. Black and Hispanic communities will disproportionately face greater risks of prolonged periods of unemployment due to the imposition of a $15 minimum wage policy. This is illustrated in understanding that the Black and Hispanic community had a peak rate of unemployment of over 16.8 and 18.9 percent respectively, whereas the White population had only a peak rate at 13.6 percent as of December 2020 (Soto). As an increase in the federal minimum wage will only force more businesses to relieve workers from their duties, the unemployment rate within such groups will only grow by a factor amount, meaning that the communities of color will experience even more unemployment as large proportion of their population is concentrated in the low-income bracket. The imposition of the federal minimum wage is also particularly damaging to the teenage and young adult working populations. A study on the Great Recession found that sustained U.S. employment declines remained at 7.5 percentage points for those aged 15-24 years old (Clemens 34). Due to the indisputable tendency for young workers to possess less experience and skill, most are given low-skilled jobs that make them easily replaceable workers. Biden’s federal minimum wage is especially damaging to the economic security of such young workers as their job security is weak. This means that the difference in mean employment in the labor force between the older, wealthier, and more established class and the younger, less experienced class will be exacerbated. Such consequences will only create greater hostilities between low-income households and the upper echelon as the socio-economic divide in U.S. society surges.
Biden’s federal minimum wage policy carries significant implications that are especially destructive to the wellbeing and livelihood of small businesses and minorities, making it undesirable. It directly violates the freedom for low-income bracket workers to maintain a sustainable lifestyle and feed their families and children. The federal government will need to allocate more resources to social security to those who seek unemployment benefits, drastically increasing transfer payments to the unemployed. This further exacerbates the deterioration of the U.S. economy as resources that could have been used on public infrastructure, policy regulations, or even the military are spent on non-growth sectors of the U.S. economy. The proposition of a $10 or $12 minimum wage policy may prove to be a better solution.
Alsalam, Nabeel, et al. “The Effects on Employment and Family Income of Increasing the Federal Minimum Wage.” Congressional Budget Office, Congress Of The United States Congressional Budget Office, July 2019, http://www.cbo.gov/system/files/2019-07/CBO-55410-MinimumWage2019.pdf.
Chava, Sudheer, et al. “ DOES A ONE-SIZE-FITS-ALL MINIMUM WAGE CAUSE FINANCIAL STRESS FOR SMALL BUSINESSES?” National Bureau Of Economic Research | NBER, National Bureau Of Economic Research , Dec. 2019, http://www.nber.org/system/files/working_papers/w26523/w26523.pdf.
Clemens, Jeffrey. “Making Sense of the Minimum Wage: A Roadmap for Navigating Recent Research.” Cato.org, Cato Institute, 14 May 2019, http://www.cato.org/policy-analysis/making-sense-minimum-wage-roadmap-navigating-recent-research#notes.
Rustici, Thomas. “A PUBLIC CHOICE VIEW OF THE MINIMUM WAGE.” Cato Journal, Cato Institute, July 1985, https://www.cato.org/sites/cato.org/files/serials/files/cato-journal/1985/5/cj5n1-6.pdf.
Soto, Isabel. “Examining the Effects of Raising the Federal Minimum Wage to $15.” AAF, American Action Forum, 25 Feb. 2021, http://www.americanactionforum.org/insight/examining-the-effects-of-raising-the-federal-minimum-wage-to-15/.
VandenBerg, Christopher, and Walter E. Block. “The Problem with the Minimum Wage .” Review of Social and Economic Issues, Romanian–American University, 3 Nov. 2021,rsei.rau.ro/images/V2N3/Christopher%20VandenBerg,%20Walter%20E.%20Block,%20Ph.D.pdf.
Wilson, Mark. “The Negative Effects of Minimum Wage Laws.” Downsizinggovernment.org, Cato Institute, 1 Sept. 2012, http://www.downsizinggovernment.org/labor/negative-effects-minimum-wage-laws.