Saturday, April 13, 2024

Two-tier Minimum Wage is the Best Way to Combat Income Inequality.

The federal minimum wage in the United States is $7.25 an hour and it has not changed since July 24, 2009. To account for the cost of living increases, 29 states have set minimum wages above the federal minimum wage level of $7.25 per hour. Avid supporters of the $15 an hour minimum wage argue that a higher minimum wage would improve the standard of living of close to 30 million hourly wage employees: fast-food workers, retail salespeople, child care workers, gas station attendants, waiters, and many more.

Many studies have linked higher income to better nutrition, higher quality healthcare, a safer living environment, and longevity and why would we not want it for our hardworking citizens. Not to mention that for the vast majority of people, employment is linked to self-esteem and a sense of purpose.

The federal minimum wage has experienced sizable hikes in the past – in 1944 and 1955 it rose by over 33%. An increase of this magnitude would raise the current federal minimum wage rate to only $9.65. As a Ph.D. labor economist, I am very concerned that such a drastic increase in the federal minimum wage from the current level of $7.25 to $15 an hour will lead to an estimated loss of at least 1.4 million jobs according to the Congressional Budget Office. While some large companies such as Amazon and Walmart are already paying their employees at least $15 an hour, smaller companies in mid-America are simply unable to pay their employees a minimum wage of $15 an hour. Somewhere in the heart of West Virginia, Missouri, or Ohio, small business owners running a coffee shop, book store, or convenience store will not be able to meet the payroll if the minimum wage is set at $15 an hour.

Many proponents of the $15 an hour federal minimum wage point out that the current federal minimum wage is grossly insufficient to live alone and own a car, so it is not a “living wage”. However, when the minimum wage was implemented in 1938 under the Fair Labor Standards Act (FLSA) it was championed to protect the workers from being underpaid by their employers. In addition, many minimum wage employees receive benefits that depend on earnings and are reduced when that income increases.

Incidentally, around twenty percent of minimum wage workers in the US are teenagers 16 to 19 years old who oftentimes still living with their parents, and learning the basic skills of trade that are needed to take part in the labor market. They are not the poor working adult demographic that the federal minimum laws are supposed to protect.

Given the exponentially rising level of inequality in the US, I believe that there should be a two-tier federal minimum wage. There is absolutely no reason large companies cannot take advantage of economies of scale and scope and pay their workers a living wage of $15 an hour. Smaller companies ought to be able to pay the federal minimum wage of $10 an hour and serve as the entry point into the labor market for teenagers and young adults.


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