How important are employees to the economy? Essentially, this is the question underlying every debate about minimum wage. Raising the minimum wage by state levels, like what happened in California, have shown that employees’ wages are a high priority, and have passed laws to raise the wage to $15 an hour over the course of the next few years. California is largely credited with being the first state to raise wages to $15, but New York followed on the same day in April 2016 with a similar law that will raise wages in many regions of the state by 2021.
According to New York Governor Andrew Cuomo’s office, the law will affect 2.3 million people living in the state. On the same day, Cuomo also enacted an allowance for 12 weeks of paid family leave. “By moving to a $15 statewide minimum wage and enacting the strongest paid family leave policy in the nation, New York is showing the way forward on economic justice,” Cuomo said. “These policies will not only lift up the current generation of low-wage workers and their families, but ensure fairness for future generations and enable them to climb the ladder of opportunity.”
Of course, with a major change that affects the business community and the economy at large, there are people on both sides of the change who either approve of or oppose increasing the hourly rate. In broad strokes, the arguments boil down to whether low-income employees should take priority, or if business stability is more important for the larger economy. The conversation centers around employees, but the effects on the workforce remain to be seen.
Boosting the minimum wage could increase spending
When New York and California increased their minimum wages, many employee advocates celebrated. The conventional wisdom here is that low-income workers, who are already strapped for cash, are likely to spend their extra dollars on rent, food, and other consumer goods. In contrast, having those dollars go toward the wealthier workforce (by means of raises, bonuses, etc.) could encourage a propensity to save that money — which doesn’t boost the short-term economy.
“More money for wages means more spending money in the pockets of people and families lower on the income spectrum, where every dollar increase in earnings produces a much larger boost in consumption at nearby businesses than is true among the wealthy,” the left-leaning Think Progress website contends. In other words, low-income people desperately need that boost in their wages to make ends meet, and they’re likely to put that money right back into the economy when it lands in the bank account.
In New York, those boosts in paychecks will take time, and vary depending upon location. Large businesses (with 11 employees or more) in New York City will need to reach the $15 minimum threshold by the end of 2018. By the end of 2016 alone, the minimum wage for those employees will rise to $11. Small-business employees will see their wages rise to $15 per hour by the end of 2019, with employees in surrounding counties reaching the $15 bar by the end of 2021.
The largest concern for many people is that businesses outside of the booming New York City metropolis won’t be able to command the same prices for goods and services. As a result, the minimum wage for the rest of the state will increase to $9.70 by the end of 2016, and then rise $0.70 each year until reaching $12.50 in 2020. At that point, the increases will be indexed by various government agencies, including the Department of Labor.
The wage hike could lead to higher unemployment
To every argument there are at least two sides. In the case of a significantly higher minimum wage, the concern is that rising wages will negatively affect the businesses who employ those workers — eventually leading to layoffs and/or higher operating costs that are passed on to all consumers.
One likely short-term effect of the $15 minimum wage hikes will be decreases in staffing and increases in prices as business adjust to the required jumps in their payroll costs, writes Steven Lindner, executive partner of the think tank The WorkPlace Group and contributing writer to the New York Daily News. There will likely be a greater push for automation and perhaps even outsourcing of jobs — if not overseas, then at least to domestic locations where the minimum wage isn’t as high, Lindner predicts. Labor costs could increase 11% to 66% compared to other cities in the nation, making it difficult to make a profit.
If this trend actually occurs, it could end up hurting the very people the law is meant to help, Investopedia posits. By means alone, businesses might be forced to lay off employees whom they can’t afford to keep. In other cases, they might avoid hiring low-skill workers altogether, instead looking for more cost-effective solutions. “The real effect of a $15 per hour minimum wage is to make unemployable those workers who seem too risky or too unproductive to justify an extra $15 per hour of labor,” Investopedia writer Sean Ross argues. In other words, the level of productivity of a worker who is earning $9 an hour now might not be worth $15 to a business — ending up with a situation where that employee gets a pink slip instead of a raise.
The increases might not matter
Economists vary on how they believe the wage hikes will affect the economy at large. Some believe it will have little or no impact, U.S. News & World Report states. Other institutions believe the hikes are a bad idea, but won’t actually impact much because the laws might not be strictly enforced.
That’s the thesis of Reason.com, a website that emphasizes “free minds and free markets.” Their argument is that many businesses already ignore minimum wage laws, and the state and federal departments of labor can’t do much to enforce the base wages anyway. “Ensuring that New York businesses comply with government-mandated wage floors falls primarily to a dysfunctional and understaffed division of the state government,” writer Jim Epstein argues. “Many businesses don’t heed the current $9 minimum; when the rate rises to $15, the ranks of the noncompliant will swell.”
Whether that theory comes true remains to be seen. In reality, it will likely be several months until we start to see proof of the effects on the economy — if we see any changes at all. To be sure, other states (and perhaps even the federal government) will be keeping an eye on what’s happening in California, New York, and other areas to see what happens with the minimum wage debate — and how low-income workers actually fare.