Why Raising the Minimum Wage Is Not Going to Fix the Problem

Source: Spencer Platt/Getty Images

Spencer Platt/Getty Images

The national debate about raising the minimum wage continues to escalate. The federal minimum wage rate is $7.25, a figure that hasn’t been touched since it went into effect in June 2009. Though President Barack Obama has made repeated efforts to increase that amount, Congress has made little headway in deciding what an appropriate increase would be. In fact, nothing has been accomplished on a national level, despite Obama’s call to “Raise the Wage” during his 2014 State of the Union address, followed by an executive order that raised the minimum wage to $10.10 for all people working on new federal service contracts. As a result of little action in Washington, D.C. but ongoing public protests to increase pay for low-wage workers, individual states, cities, and companies have pledged to raise minimum pay to $9, $10, and even $15 per hour.

Advocates of raising the minimum wage say that the increases will help families get out of poverty and rely less on government programs for assistance. Critics say it hurts businesses and the economy as a whole. But no matter what level a minimum wage increase reaches, is there an amount that will make everyone happy? The chances of achieving a happy medium are scare in the minimum wage debate, largely because the discussion about minimum wage is more than a talk about dollar figures. It’s also a discussion about justice and equality, and those are much more difficult to pin down and reach a consensus about.

The debate about raising the minimum wage is one of those perennial discussions in which at least a few people will leave feeling like they’ve lost something. New York’s governor, Andrew Cuomo, is likely reminded of this on a daily basis as he tries to straddle the middle of a deeply divided state in terms of minimum wage. New York’s legislature began a staggered wage increase in 2013 that will end with a $9 minimum wage statewide by the end of this year. But Cuomo is now calling for an additional hike to $10.50 per hour. Advocates on the left are angry it’s not the $13 to $15 they want, and conservatives and business lobbyists are angered that Cuomo would seek to raise the rate at all.

“The Assembly wants to raise it to $15 an hour. God bless them—shoot for the stars—that’s what they did in the Assembly,” Cuomo said during a rally in mid-March. “The Senate is totally against raising the minimum wage. I think the truth is somewhere in the middle, I proposed raising $9 to $10.50 statewide. Often, the political truth is in the middle.”

At the heart of the minimum wage discussion is whether a higher rate will do the most good for the most people. The Obama administration writes that by raising the national minimum wage to $10.10, more than 28 million Americans will see their paychecks increase. The administration goes on to say that rises in inflation means that the value of the minimum wage has decreased by a third since the 1980s, and that raising it would have short-term benefits to the economy as people begin to spend more of those wages. But others, including Forbes contributor Mike Patton, say that even if the wage were raised to $15 per hour nationwide, and every cent of that increase was spent back into the economy, it would only increase GDP by 1.25%. It’s not a reason to stop the minimum wage talks altogether, but it is what Patton calls a “red herring” for the economic benefit claim.

Another aspect for debate is whether higher wages will lead to a greater sense of satisfaction and happiness among employees. Those intangibles don’t directly affect a company’s bottom line, but can affect profits in terms of employee productivity, turnover rates, and more. The Department of Labor calls raising the minimum wage a “no brainer,” among its evidence citing a testimonial from a small business owner who said her employees stayed with her company longer when she began paying them $10 per hour. A 2010 study published by the National Academy of Sciences showed that as income increases, so does a person’s life evaluation. This is the same study that inspired Gravity Payment’s CEO, Dan Price, to drop his salary by $930,000 in order to raise his company’s minimum wage to $70,000 per year.

Two political scientists at the University of Illinois and the University of Notre Dame also correlated the minimum wages of several countries with how they scored in terms of life satisfaction. By plotting those together, the two showed a positive correlation between higher minimum wages and higher levels of life satisfaction, or “happiness.” That holds true when certain factors like GDP (the size of a country’s economy) and the nation’s unemployment rate are controlled.

As with all plotted graphs, the authors acknowledge that correlation does not determine causation. In other words, there could be several factors that influence why people in certain countries are happier than others, not just the minimum wage. While the base rate may have something to do with it — and many studies suggest it does — others suggest the rate of pay is only the beginning. To truly institute a rate of pay that makes the most people happy, it needs to come with a sentiment of justice.

Joe Raedle/Getty Images

Joe Raedle/Getty Images

Dr. Michael Ungar, a writer for Psychology Today, puts it like this: “A higher minimum wage may help families avoid the food banks, but it won’t make them any happier unless their wages hit a level where they feel fairly compensated for the work they do and their wages are positioned well when compared with the paycheques [sic] of others. In other words, more money does not equal happiness unless it brings with it social justice.” Ungar advocates that raising the minimum wage does help families in need, and gives everyone who is affected more buying power. But they won’t be happy unless they also feel they’re being compensated fairly compared to others, either within the company or in similar positions elsewhere.

The study from the National Academy of Sciences backs up this idea. Life evaluation will continue to increase with income, it said. But emotional well-being (happiness) stops increasing with any significance around the $75,000 salary mark. That’s the level at which most basic needs can be met without significant trouble, the study suggests, therefore not having as much of an affect on well-being.

Perhaps this is where conversation about the disparity of pay between executives and typical employees becomes relevant. One recent study suggests that larger firms, often with highly paid CEOs, are one of the main contributors to wage inequality in the United States. The Economic Policy Institute reports that CEO wages increased by 937% between 1978 to 2013. A typical worker’s compensation grew just 10.2% over that same period.

Referencing the Psychology Today article once more, if employees’ overall happiness depends on perceived equity and worth of their work, not just a higher dollar figure, then the goal of looking out for America’s well-being becomes even more difficult than convincing people to meet in the middle on minimum wage. It also becomes necessary to decrease the pay gap company-wide. Not too many CEOs are willing to take the pay cut that Dan Price just did, and critics argue he might end up paying himself more anyway through bonuses and other means. But the bottom line is this: Raising the minimum wage will likely help those at the very bottom, which would undoubtedly bring about a sense of relief. But as long as wage disparities in companies like Disney, Microsoft, and Oracle are the difference of millions of dollars per year, minimum wage workers could realize that the unhappiness persists even with a slightly bump in their paycheck.

Follow Nikelle on Twitter @Nikelle_CS

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