Over the past several years, American politics has seen the rise of several movements which have been gaining more and more notoriety. Protesters have, on occasion, taken to the streets wielding signs reading “fight for 15” or “living wage now”. Of course, the movements are rallying around the goal of passing regulations that would mandate a national increase in the minimum wage. Currently, the national minimum wage is set at $7.25 per hour, although 29 states have introduced their own minimum wages that surpass the federal minimum. This controversy has been subject to relentless debate, with voices on both sides strongly asserting a variety of stances. Like many other issues, people often get tied up in the frenzy of emotion and passion that surrounds such a topic. Many a time, logical analysis of the issue is shrouded by the mainstream madness, and is ignored by far too many of those who decided to take a stance on the issue. In this post I will attempt to present some of the underlying theory and data that proves consequential in deciding the debate between the two schools of thought. Ideally, introducing basic logical concepts to this controversy will aid in moving towards achieving some state of stasis between opposing proponents. Such an achievement would be crucial to furthering the development of a plausible solution to this problem.

First, it is essential to lay out what exactly raising the minimum wage is, and what exactly the mechanics of such a move would look like. Many supporters of a minimum wage increase call for and increase from the current $7.25 to $15.00 per hour. If this were to occur, it would take place in the form of federal legislation being passed, mandating an increase in the national minimum hourly wage employers are allowed to pay their employees. In economics, this type of regulation would be categorized as a price floor. A price floor is simply a government imposed minimum price on certain market for a good. Typically these regulations are designed to aid firms by artificially raising the prices of their products, which in theory generates more revenue for the firm. However, the increased price of the good causes consumers’ demand for the product to decrease, and since the firm can only sell as many goods as are demanded, less goods will have been sold than would have been without the price floor. This decrease in the quantity of transactions is know as “dead weight loss” and illustrates the opportunity cost, or loss, that society incurs as a result of the regulation.

In the minimum wage scenario, the market in question is the market for labor. Firms demand labor from potential employees and people looking for jobs supply the labor. In this case, the price floor changes slightly in intuition since it is meant to help the employees who act as suppliers of labor as opposed to firms who make up the demand. As I mentioned, dead weight loss caused by a price floor involves the number of transactions that are prevented from happening by the floor. The important thing to note is that in this situation each lost transaction represents a person becoming unemployed due to the unwillingness or inability of employers to pay for those employees as a result in the increase in price. Those who argue against a minimum wage increase often site these applications of the laws of supply and demand as hard evidence of the dangers of imposing such regulation. Additionally, they argue that due to the natural competitive nature of the market, many firms already pay wages above the minimum wage and offer raises to employees in order to remain competitive in the labor market. Following this logic, raising the minimum wage at the federal level would have overall detrimental effects and should be avoided.

On the contrary, it should be noted that the previously noted theory and logic is a very simplified model of reality and likely overlooks various variables that are difficult to measure. Proponents of a higher minimum wage have raised several legitimate points that are worth noting. A common argument is that the current minimum wage has failed to retain its purchasing power due to inflation. This seems to hold some truth as the Pew Research Center notes that the current wage has lost approximately 9.6% of its value to inflation. Another legitimate argument is that raising the wage would theoretically put more money into the hands of employees, which in turn would spend that extra money, leading to increased economic activity and production overall.

When it comes to numbers, there is generally little consensus on producing a forecast for the results of raising the wage. Chicago Federal Reserve economists estimated that raising the federal minimum wage by $1.75 would result in an increase in overall household spending by $48 billion, boosting the GDP and contributing to economic growth. Contrarily, the Congressional Budget Office predicted that increasing the minimum from $7.25 to $10.10  would result in the loss of 500,000 jobs. The numbers are clearly contradictory and that is likely a testament to the complexity of this issue. It is very difficult to predict exact outcomes of wage increases, however it is possible to make logical and informed decisions based on data and theory rather than emotion and impulse. The around 100% increase from $7.25 to $15.00 an hour would likely the create problems of dead weight loss and unemployment, particularly due to the drastic nature of the shift. However, it is also quite possible that a more modest wage increase could have beneficial effects. Overall, it is best to get past the emotional, impulsive form of advocacy and really get down to realistic options.