The Biden administration is pushing for a new $15 minimum wage. Some have casted doubt on this government intervention. Governments often intervene in markets to correct market failures or to bring equitable outcomes. This administration’s proposal to establish a new $15 minimum wage is a form of government intervention because it attempts to control the price in the labour market.
While Biden is correct that the proposal would be a benefit for all people working below a living wage, we must also seriously recognize the extensive benefits this proposal brings by disproportionately impacting minorities. Blacks and females would benefit most from the rise in minimum wages as they are more likely to receive minimum wage in the current market structure. Hence, a large portion of the 27 million people who would see an increase in wages will be those who have previously been economically disempowered. Guaranteeing higher wages may allow these minority groups to spend more of their time on potentially uplifting activities like education that would ultimately allow an upward social mobility between the sexually and racially divided classes—a significant step towards equitable distribution.
Delving further, QM number of workers are currently willing and able to work at $7.25/hour (PM) . The government will be attempting to protect the producers (employees) by establishing the price floor at $15/hour. Yet, at PMin, the employers are only willing and able to hire Q1 number of workers while Q2 number of labourers are still hoping to be employed. This creates the deadweight loss of d + e, causing a surplus of labour between Q2 and Q1.
Recent reports have claimed that the loss of jobs could reach 1.4 million, which is indicated by the QM – Q1. Compounded with the recent COVID-19 pandemic, being laid off in the midst and/or after such a crisis would be catastrophic. Although 27 million people may have their wages increased and another million people be lifted out from poverty, we shouldn’t overlook the possible short term consequences as some significant number of workers may be laid off.
However, the proposal addresses some of the long term problems. Because the nominal—minimum—wages haven’t increased since 2009 whilst the average price level has also been on the constant rise, the real wages of labourers have actually been decreasing over the past decade. The US may observe a further increase in the average price level for the next five years due to Biden’s 1.9 Trillion dollar COVID relief package. This perhaps prompts the need for the wages to increase to compensate for the rise in long term cost of living.
Yet, an important stakeholder is low-skilled workers. As they are easily replaceable and unspecialized, the demand for low-skilled labourers are likely to be highly elastic. This means that when the minimum wage increases, the fall in demand for these workers will be proportionately greater than the relative price increase, possibly causing significantly more unemployment of low-skilled workers than anticipated in the recent research.
More menacingly, the increase in cost of hiring employees will inevitably lead to businesses being heavily burdened. Since large firms like Amazon and Target have already met the $15 wage expectation, most firms that will be adjusting to this policy will be the small businesses. As most small firms can’t maintain such high costs, it may lead to several small businesses closing. Infact, the disproportionate burden on small businesses may further grant monopoly power to tech and retail giants. Large Corporations that can stay competitive despite the artificial increase in cost of hiring would likely out compete smaller businesses in the long term, diminishing competition.
We must also account for regional stakeholders. The cost of living may vary across the country, requiring wage contracts to consider the local cost of production and living. For instance, in cities like Seattle, the cost of living may be far more expensive than in states like Louisiana where some workers are willing and able to work below the proposed $15 federal minimum wage. With this government intervention, potential job seekers in the deep south and American Midwest who may still consider the $7.25/hour a living wage could face unemployment.
In addition, with the global surging trend for automation, the significant rise in the cost of employing low-skilled workers may incentivize some burdened small businesses to search for substitutes like Kiosk machines. While a general progress in technology is to be merited, doubling the minimum wage over the next five years may kick-start a period of accelerated automation without any real transitory stage, leaving many employees unemployed.
In summation, an increase in minimum wages is favorable while the extent and the rate of the increase can be debated. However, we must take into consideration the huge progressive step this proposal would be for the marginalized minorities.
The link to the article can be found below:
Sang Yoon (Fred) Lee
He is a student of NLCS Jeju. The featured article is one of the commentaries for Economics IA (Micro).
