Increasing the minimum wage would combat pay inequality especially based on race and gender and would drive up consumer spending. However, women only make up Featured image source: Scott Olson Getty Images. Disclaimer: The views published in this journal are those of the individual authors or speakers and do not necessarily reflect the position or policy of Berkeley Economic Review staff, the Undergraduate Economics Association, the UC Berkeley Economics Department and faculty, or the University of California, Berkeley in general.
Your email address will not be published. Save my name, email, and website in this browser for the next time I comment. Skip to content. Share Tweet LinkedIn Pin. This is rarely the case in the real world , where a few companies frequently dominate in what are known as monopsonies. And so others theorized that because monopsonistic companies had the power to set wages artificially low, a higher minimum wage could, perhaps counterintuitively, prompt companies to hire more workers in order to recover some of their lost profitability as a result of the increased labor costs.
Unlike in medicine or other sciences, economists cannot conduct rigidly controlled clinical trials , a method vacinologists used to test the efficacy of COVID vaccines.
Due to financial, ethical or practical constraints, we cannot easily split people into treatment or control groups — as is common in psychology. And we cannot randomly assign a higher minimum wage to some and not others and observe what will happen, which is how a biomedical scientist might study the impact of various treatments on human health.
And in studying the minimum wage, we cannot simply look at past times when it was increased and check what happened to unemployment a few weeks or months later. This is where the pioneering work of natural experiments like the ones Card and Krueger have used over the years to study the effects of raising the minimum wage and other policy changes comes in. But because of Card, Krueger and their research, the debate over the minimum wage has gotten a lot less theoretical and much more empirical.
This figure, of course, doesn't factor in any taxes or deductions from Adam's paycheck. This doesn't leave him with much money to save or to spend on any emergencies. Feeling the pinch of lowered real income, minimum wage employees and their advocates have gone to great lengths since the s to raise awareness about the plight of low-wage workers.
Everything else about these companies' business models would remain the same. Most economists agree that the world is imperfect and confounded by many other variables that are affected by a minimum wage increase.
Most businesses set their budgets at least a year in advance, designating a fixed amount of money to wage expenses. Changes in business volume throughout the year can obviously necessitate on-the-fly adjustments to wage expenses. For the most part, companies have a set idea of how much they want to spend on hiring workers.
When forced to pay workers more per hour, companies have to hire fewer workers or assign the same number of workers fewer hours to keep from going over their predetermined wage expense limits. Many companies do just that or, when possible, they ship jobs overseas, where the per-hour expense of an employee is significantly lower. Automation is another alternative that many companies turn to in order to avoid higher wage expenses.
This is particularly true in large cities like Los Angeles and Seattle. Rather than giving their order to a live employee at the counter, fast-food customers input what they want into a computer, which also accepts payment and even deposits the paper sack full of food when it comes out of the kitchen. One of the most important metrics for a business is margin; another word for profit.
Margin is the difference between revenues and expenses, and any successful business has a target margin it tries to maintain. When expenses increase, which happens when a higher mandated minimum wage pushes up a company's wage expense, revenues must also rise for the company to maintain its margin. Therefore, many businesses respond to higher wages by raising prices.
When the cost of a fast-food hamburger increases to cover higher wages, many customers respond by not buying hamburgers. After all, most people don't eat fast food because it's delicious, they eat it because it's cheap. When customers jump ship, companies struggle to stay in business.
Family Finances. Your Privacy Rights. Understanding the Unemployment Rate. Unemployment and the Economy. Dictionary of Economic Terms A-F. Dictionary of Economic Terms G-Z. Table of Contents Expand. The Arguments, Pros and Cons. States, Cities, Counties Set Minimums. Some Employers Establish Minimums. The Bottom Line.
Key Takeaways The minimum wage has been a political issue since its inception in the s. Opponents of raising the minimum wage argue that it will cause unemployment, while proponents say it could boost consumer spending, resulting in more jobs. In addition to the federal minimum wage, many cities, counties, states, and employers have established their own minimum wages. Article Sources. Investopedia requires writers to use primary sources to support their work.
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