This is the worlds leading source of financial content on the web, ranging from market news to retirement strategies, investing education to insights from advisors.
Forex Forever!

How Minimum Wage Impacts Unemployment

Author: Michael Jackson

It has been over five years since the hourly federal minimum wage was increased from $6.55 to $7.25. During this period, individuals living on Social Security benefits received a cost-of-living adjustment (COLA) of 8.5%. This begs several questions: Is the minimum wage a viable living salary? If not, how does it impact the economy? Will an increase in the minimum wage reduce employer profits, resulting in the loss of jobs?

According to the National Conference of State Legislatures (NCSL), 29 states and Washington, DC currently have minimum wages that are higher than federal requirement. According to the October, 2014 report, Improving Wages, Improving Lives: Why Raising the Minimum Wage is a Civil and Human Rights Issue by Georgetown University's Center on Poverty and Inequality and the Leadership Conference Education Fund, the minimum wage set in 2009 does not cover today's basic living expenses for a family. For example, an employee receiving the federal minimum wage earns $15,080 per year, which is above the 2013 poverty threshold of $11,868 for one person. However, this salary is below the poverty level for families of two, three, or four individuals at $15,142, $18,552 and $23,834 respectfully.

Low income working families make up 60% of those receiving food stamps and 47% on Temporary Assistance for Needy Families (TANF), according to a 2014 report "Local Minimum Wage Laws: Impacts on Workers, Families and Businesses" from University of California, Berkeley's Institute for Research on Labor and Employment (IRLE). The authors conclude that enrollment in public assistance programs coincides with the federal poverty level and that increasing the minimum wage reduces public assistance program participation. They suggest that a 10 percent increase in minimum wage reduces food stamp program enrollment by between 2.4 and 3.2 percent, and reduces program expenditures by 1.9 percent. Currently, public assistance for the lowest wage earners totals billions of dollars.

During his 2014 State of the Union address, President Obama urged Congress to increase the minimum wage to $10.10 in 2016. A report from the Congressional Budget Office (CBO) projects that an increase in the federal minimum wage to $10.10 per hour will result in higher paychecks for 16.5 million employees. Of those individuals, 900,000 will rise above the poverty level. Experts cited in the UC Berkeley working paper estimate that an increase in the federal minimum wage to $10.10 will reduce food stamp expenditures alone by about $4.2 billion per year. On the flip side, if this increase in enacted, it is estimated that 500,000 workers will be released from their jobs, according to the CBO.

According to the National Federation of Independent Business (NFIB), small businesses do not have the res to absorb an increase in the minimum wage since most earnings go back into a small company. As a result, they argue, hiring and promoting employees will slow down substantially in that sector. However, the United States Department of Labor reviewed 64 studies on the effects of minimum wage increases and unemployment, finding no correlation between the two. The studies suggest that an increase in the minimum wage decreases employee turnover along with the expenses associated with hiring and training new workers.

Employers have alternatives to offset a higher minimum wage, such as raising prices and lowering profits. Moreover, a higher hourly rate will reduce the expense of employee turnover, increase productivity, foster positive attitudes, and improve attendance since issues such as lack of transportation, healthcare, and childcare will decline. In addition, higher paid employees increase productivity.

The Bottom Line

More than half of the states in the US have minimum wages that exceed the federal requirement. It has been over five years since the federal minimum wage has increased, but the cost of living continues to rise. Because the two are not in sync, there is proposed legislation to increase the federal wage to $10.10 per hour beginning in 2016. If this increase in enacted, only a few states will have minimum wages above the federal wage.

last five articles

#457 Working Longer Vs. Saving For Earlier Retirement

Author: Christopher Smith

As life gets in the way, many people think, "I will just work longer rather than worry about saving right now." (See The New Retirement Age.) Saving can be very difficult when you are trying to meet the monthly bills and put children through college.Working Longer Doesn't Always Wo... see more

#1761 Best 2015 Balance Transfer Credit Card Promotions

Author: Jacob Jackson

The balance transfer – it's probably one of the most successful credit card promotions ever invented. Maybe you have a credit card from way back in the day when you made next to no money, had no credit history and were happy to get a $500 credit limit with a 20-something-percent interest rate.... see more

#1159 Audi Debuts 2017 R8 Spyder at New York Auto Show

Author: Michael Smith

Audi debuted its open-top R8 Spyder this week at the 2016 New York International Auto Show. The convertible companion to the R8 coupe features a 5.2 liter V-10 engine with 540hp and 398 pound-feet of torque. While this comes in at 70hp less than the available 610hp coupe, the R8 Spyder can still ... see more

#1560 Credit Card Review: Citi Diamond Preferred

Author: Andrew Davis

The Citi Diamond Preferred card affords qualifying borrowers the chance to break from exorbitant fees or annual percentage rate (APR) charges. Citi Diamond Preferred cardholders receive a competitive APR, and they get a 0% intro APR for 21 months on every single new purchase.Combine this w... see more

#1446 Going Back to India to Retire: A How-to Guide

Author: Michael Davis

While the majority of Americans spend their retirement years in the U.S., it's not uncommon for retirees to head overseas in search of things like a more temperate climate, new adventures, a change of scenery or even a lower cost of living. If you have family roots in a foreign country – for ex... see more