How Minimum Wage Impacts Unemployment

how is minimum wage calculated

It has been over five years since the hourly federal minimum wage was increased from $6.55 to $7.25. During this period, individuals living on Social Security benefits received a cost-of-living adjustment (COLA) of 8.5%. This begs several questions: Is the minimum wage a viable living salary. If not, how does it impact the economy? Will an increase in the minimum wage reduce employer profits, resulting in the loss of jobs?

According to the National Conference of State Legislatures (NCSL), 29 states and Washington, DC currently have minimum wages that are higher than federal requirement. According to the October, 2014 report, “Improving Wages, Improving Lives: Why Raising the Minimum Wage is a Civil and Human Rights Issue” by Georgetown University’s Center on Poverty and Inequality and the Leadership Conference Education Fund, the minimum wage set in 2009 does not cover today’s basic living expenses for a family. For example, an employee receiving the federal minimum wage earns $15,080 per year, which is above the 2013 poverty threshold of $11,868 for one person. However, this salary is below the poverty level for families of two, three, or four individuals at $15,142, $18,552 and $23,834 respectfully.

Low income working families make up 60% of those receiving food stamps and 47% on Temporary Assistance for Needy Families (TANF), according to a 2014 report "Local Minimum Wage Laws: Impacts on Workers, Families and Businesses " from University of California, Berkeley’s Institute for Research on Labor and Employment (IRLE). The authors conclude that enrollment in public assistance programs coincides with the federal poverty level and that increasing the minimum wage reduces public assistance program participation. They suggest that a “10 percent increase in minimum wage reduces food stamp program enrollment by between 2.4 and 3.2 percent, and reduces program expenditures by 1.9 percent.” Currently, public assistance for the lowest wage earners totals billions of dollars.

During his 2014 State of the Union address, President Obama urged Congress to increase the minimum wage to $10.10 in 2016. A

report from the Congressional Budget Office (CBO) projects that an increase in the federal minimum wage to $10.10 per hour will result in higher paychecks for 16.5 million employees. Of those individuals, 900,000 will rise above the poverty level. Experts cited in the UC Berkeley working paper estimate that an increase in the federal minimum wage to $10.10 will reduce food stamp expenditures alone by about $4.2 billion per year. On the flip side, if this increase in enacted, it is estimated that 500,000 workers will be released from their jobs, according to the CBO.

According to the National Federation of Independent Business (NFIB), small businesses do not have the resources to absorb an increase in the minimum wage since most earnings go back into a small company. As a result, they argue, hiring and promoting employees will slow down substantially in that sector. However, the United States Department of Labor reviewed 64 studies on the effects of minimum wage increases and unemployment, finding no correlation between the two. The studies suggest that an increase in the minimum wage decreases employee turnover along with the expenses associated with hiring and training new workers.

Employers have alternatives to offset a higher minimum wage, such as raising prices and lowering profits. Moreover, a higher hourly rate will reduce the expense of employee turnover, increase productivity, foster positive attitudes, and improve attendance since issues such as lack of transportation, healthcare, and childcare will decline. In addition, higher paid employees increase productivity.

The Bottom Line

More than half of the states in the US have minimum wages that exceed the federal requirement. It has been over five years since the federal minimum wage has increased, but the cost of living continues to rise. Because the two are not in sync, there is proposed legislation to increase the federal wage to $10.10 per hour beginning in 2016. If this increase in enacted, only a few states will have minimum wages above the federal wage.

Source: www.investopedia.com

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