In 2007, the minimum wage was increased from $5.15 to $5.85 per hour, the first increase in over a decade. The intent was to facilitate job growth and lower the unemployment rate for less skilled workers. Last week, a group of economist pleaded their case to Congress advocating for yet another raise in minimum wage. With the continually sluggish economy, the unemployment rate for low wage earners continues to climb. By increasing the minimum wage, it is thought the standard of living among low wage earners would improve, leading to a much needed boost in the economy. However, not everyone agrees with this theory.
Correlation or Causation?
Since the recession began, many have looked to “corporate greed, “unregulated lending” and “unrestrained capitalism” for the blame. Without denying those factors as contributors to the current state of the economy; a recent analysis reveals there may also be a link between the increase of minimum wage in 2007 and the increase in unemployment rate. Many bills have been passed over recent years, attempting to spur job growth and lower the unemployment rate. The 2007 minimum wage increase serves as one example. Since the increase in 2007, the unemployment rate rose by nearly 5% by 2010. The largest increase was observed among less skilled workers, those that would be in positions to benefit from a minimum wage increase.
Although this recent analysis could be deemed coincidental, a review of historical data regarding minimum wage increases reveals otherwise. Over the past 40 years, Congress has increased the minimum wage five times. A review of these five minimum wage increases demonstrated a subsequent raise in the unemployment rate for less skilled workers. There is no claim to causality of the link between an increase in unemployment rate following a minimum wage increase, just that the relationship between the two should lead to further investigation. Additional factors such as skill set, education level, and experience level also play a role in the job market. For workers who do not intend to pursue advances in such areas, they find themselves fighting for the same entry-level, minimum wage jobs. Employers that raise the minimum wage, may end up cutting many entry-level positions in efforts to save money, leading to a lack of job availability for less skilled workers.
The New Boost
The recent analysis of the economy lead to the disappointing truth that there have not been as many added jobs as needed to spur economic growth. Those that counter the previous analysis, suggest that increasing minimum wage does boost the economy. Less skilled workers are able to put money back into the economy rather than save it, when they are earning more at work. Michael Reich, an economics professor and director of the Institute for Research on Labor and Employment at the University of California, Berkeley says, “The labor market absorbs the minimum wage.” Employees — when they stay longer, they’ll be more experienced and more productive.” Having more experienced and productive workers can lead to advancement within the organization, which will free up the lower level positions for additional less skilled workers to obtain. Regardless of any true scientific link between minimum wage and the unemployment rate, most people believe an increase in minimum wage will boost the economy. Perhaps there is something to benefit from a” believe to see” philosophy.