The Minimum Wage Should Not Be Increased

"The minimum wage is something that F.D.R. put in place a long time ago during the Great Depression. I don't think it worked then. It didn't solve any problems then and it hasn't solved any problems in 50 years."

-- John Raese

The minimum wage in the United States was established under the Fair Labor Standards

Act of 1938 in an effort to stabilize the economy following the Great Depression. It was designed to create a minimum standard of living by ensuring that workers could provide for the health and well being of their families. With its passage workers were legally ensured that they would receive a minimum of 25 cents for each hour worked. With each increase of the minimum pay rate ($7.75 today) there has been an increased level of debate. Such discussions have resurfaced again as the country attempts to deal with the impact of the Great Recession of 2008.

Economists generally agree that minimum wage increases do not affect national

employment significantly. However the size of an increase can have a dramatic impact on the employment of segments of the population, GDP, price of goods, and other measurements of productivity. From an economic perspective, mandated wages negatively impact society in the long run (all other variables being held constant); therefore we recommend that other policy measures be considered to narrow the inequality gap in our country.

A review of the supply and demand curve provides the simplest explanation for our

recommendation. A minimum wage is essentially a price floor for labor. If this floor is set above the current market price – as would be the case with an increase in minimum wage - the demand for workers will be reduced while the supply of workers will increase. As illustrated below the result would lead to increased unemployment.

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Firms will retain more productive and higher paid workers, however lower skilled and lesser paid (those you intend to assist) will be shed. Those who lose their job will then require government benefits, such as unemployment compensation and welfare, to survive thus increasing government expenditures and debt.

In the event that a firm does not fire workers the cost of the additional wages must be

addressed. Typically the increased cost of doing business can be managed in two ways. The

firm will transfer the increased cost to consumers by raising the selling price of its goods or