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The three myths of the minimum wage

For too long, the American people have always believed that increasing the minimum wage would benefit the economy as well as it would improve their living standard. But this long-standing statement is a myth that contains three misleading presumptions. The first premise is that; augmenting the minimum wage helps businesses thriving. The second premise is that increasing the minimum wage would facilitate the obtainment of employment for low-skilled workers. The third and most important premise is that surging the minimum wage helps attaining living wage. These three assertions need to be tested with empirical evidence in order to determine their truthfulness on the matter.

First Myth: Increasing the minimum wage helps businesses to thrive

The first premise avows that augmenting the minimum wage helps businesses thriving. Many cities have minimum wages that go beyond their state’s minimum wage such as Seattle, or San Francisco, that require businesses to gradually raise their minimum wages to $15 an hour. Overall 21 states and Washington, D.C. have raised their minimum wage to the $15-per-hour-track. Augmenting the minimum wage may be beneficial to big businesses and corporations such as Walmart or Amazon because they worth billions of dollars. However, the augmentation of the minimum wage does not help businesses, especially small and mid-size businesses, thriving for the mere reason that these businesses are compelled to increase the price of their products and services in order to stay in business and compete otherwise they will have to shorten their staff or go bankrupt. The incrementation of the price of goods and services suggests that the labor cost is also going to increase.

A 2019 study from Harvard Business School investigates how minimum wage affected the restaurant industry. The study shows for example that a $1 increase in the minimum wage leads to a 14% increase in the likelihood of exit for the median 3.5 median star restaurant, although it may not necessarily hurt five-star restaurants. According to the Small Business Administration, small businesses provide 55% of all jobs and 66% of all net new jobs since the 1970s in the United States. Moreover, 28 million small businesses account for 54% of all U.S. sales. These results show that small businesses play a substantial with the U.S. economy. Increasing the minimum wage to $15 will adversely affect their growth.

Second Myth: Increasing the minimum wage facilitates the obtainment of entry-level jobs for low-skilled workers.

The second premise asserts that increasing the minimum wage will make it easier for low-skilled workers to obtain entry-level employment. In fact, the minimum wage was initially implemented to help low-skilled workers obtaining an entry-level position on the labor market. Despite the fact that the intent of the government was truly genuine, data show that increasing the minimum wage actually hurts those that it intended to help; that is to say, the low-skilled workers.

There is one fundamental thing that escapes the knowledge of the average American regarding the minimum wage. Indeed, most Americans are unaware that whenever the minimum wage increases, the level of qualifications for obtaining an entry-level position also increases. Evidence from the Employment Policies Institute substantiates that the incrementation of the minimum wage hurts the availability of economic opportunities for low-skilled workers.

As a matter of fact, entry-level positions often represent the only employment opportunity for those with limited education or high school dropouts. Sixty years of economic research, including recent studies, have shown that low-wage, low-skilled employees are the most likely to lose their jobs after a mandated wage hike. Only 1.8% of American workers earned the federal minimum wage or below in 2015. This is because employers have to offer above minimum wage pay to retain talented workers. When employers are required to pay more, they choose workers with more skills and combine them with technology, such as digital ordering. As a result, low-skilled workers lose their jobs. Another evidence shows that increasing the minimum wage negatively affects low-skilled workers.

As a practical matter, a 2014 NBER study demonstrated that the recent increases in the minimum wage were responsible for 14% of the decline in the share of the working-age population employed between 2006 and 2012. The study founded that minimum wage increases significantly reduced the probability of low-skilled worked reaching the middle-class.

Every time the minimum wage increases, employers also increase the level of qualifications to obtain an entry-level job. As of today, since many areas in the United States have a minimum wage that is way above the federal minimum wage, most employers require prospective job applicants to have at least a college degree with some work experience; just to qualify for an entry-level position. It logically indicates then that if the minimum wage were to be increased to $15-an-hour, a job applicant ought to have a master’s degree in order to obtain an entry-level job. In other words, increasing the minimum wage will simply cut entry-level jobs, therefore, more low-skilled workers would be unemployed.

Third Myth: Increasing the minimum wage makes a living wage

The third premise is probably the most misleading and unsubstantiated assumption that encompasses all the myths regarding the minimum wage. Senator Sanders, in particular, has reiterated that statement in each of his rallies that increasing the minimum wage would lead to a living wage. It is a very fallacious assumption because the living wage is not based on the minimum wage. The living wage is based on the market value and the market value is based on the rate of inflation. The average American must understand that the fundamental reason as of why bureaucrats in Washington and state governments increase the minimum wage every year, is simply because they need to keep up with inflation.

As the market value is based on the inflation rate, when the prices of goods and services inflate, the living standard also inflates because an equilibrium needs to be maintained otherwise an economic bust will occur. If the living standard of a given area increases, the purchasing power of the consumer in that area, on the other hand, decreases because the latter will not have enough money to spend. Increasing the minimum wage concurrently surges the living wage and diminishes the purchasing power of the consumer. Consumers would have less to spend if prices are high because they cannot afford it. Therefore, demand will plummet.

A 2016 poll conducted by the Pew Research Center indicates that 58% of the American people are in favor of increasing the minimum wage to $15 an hour. They support this boost without fully comprehend the economic impact behind that boost. It is preponderant to grasp that the living wage is not a standardized component. It fluctuates according to the market value. Consequently, the real value of a $15 minimum wage would depend on where each of us lives. Living costs not only vary throughout the country, but they can also vary within individual states as well. Giving low-paid workers everywhere in the country the same real purchasing power would require hundreds of different minimum wages, scaled to each locality cost of living.

Regardless of where we stand whether it is politically or ideologically, we shall recognize that the minimum wage, despite its noble intentions, is not the salvation that the American people have expected from it. Raising the minimum wage will not make everyone better-off overall. Too many different factors are involved in the process to determine if increasing the minimum wage nationally is a good idea. Nonetheless, empirical evidence has already demonstrated the effect it would have on businesses, and individuals if it were to be surged.

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