America's Complicated Minimum Wage Argument

The president wants to raise the federal minimum wage to $9 an hour. Does it make good economic sense?

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In his State of the Union address, President Barack Obama proposed raising the minimum wage from $7.25 to $9 per hour, indexed to inflation. The proposal has sparked a national conversation about the costs and benefits of boosting the pay for America's poorest workers, but the debate over the federally mandated pay level has been going on among economists for decades. Below, an examination of exactly why policy wonks can't agree about when, why, and by how much to raise the wage paid to some of America's lowest earners.

If we raise the minimum wage to $9, is it going to make McDonald's cashiers super rich?

No. Not at all. At $7.25 per hour, someone working 40 hours a week earns around $15,100 per year. Nine dollars per hour puts that total at $18,700.

That's not much. How about we just raise it to $15 per hour?

It sounds great on the surface, doesn't it? It means more money for poor Americans, who tend to spend extra more readily than higher earners, as they spend a larger share of their income on basic necessities (toothpaste costs $3 a pop whether you're rich or poor, after all).

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It sounds like there's a "but" coming.

Sure is. It means higher pay for low-wage Americans, but some people argue that even raising it to $9 would ultimately boost unemployment, as employers will be able to afford to hire fewer workers. Plus there's the question of how much that labor is worth. Some economists say raising the minimum wage to too high of a level could create a disconnect, as workers are only worth paying if they're able to produce at least as much as they earn.

I mean, I make $60,000 a year. It doesn't affect me anyway whether the minimum wage is $9 or $19.

Please try not to be so fantastically shortsighted. It's true that relatively few Americans are paid the federal minimum wage. According to the Bureau of Labor Statistics, only 2.3 percent of hourly paid workers are paid at the minimum wage—around 1.7 million people (however, it's worth mentioning that 18 states and D.C. have minimum wages above the federal minimum, as of January 1. Qualifying workers in those states are paid the higher rates).

Let's say that those relatively few people are suddenly paid $19 an hour. One potential effect could be higher prices at those businesses that now must pay their workers twice as much as before. Businesses in the retail and hospitality industries may suddenly have to hike their prices to be able to afford their workers. That means higher prices for anyone stopping at the mall or Burger King—price bumps that could spread further out in the economy.

Using $19 is an extreme example, but plenty of people argue that even a small bump could have detrimental effects. After the president's speech, House Speaker John Boehner argued that raising the minimum wage would raise unemployment.

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Isn't having a minimum wage, period, causing unemployment?

Well, yes, to a certain extent. As we all learned in Economics 101, the minimum wage is a "price floor" on labor.

I didn't take Economics 101. I dropped it to take "Gender Dynamics in the Modern Horror Film."

You missed out. According to basic economics, a price floor creates a surplus, meaning that the labor supply is greater than the demand. Translated out of econo-speak, that means that the price for labor is set artificially high, with more people willing to work than business will be able to hire. It creates a certain amount of structural unemployment.

So we should bring the wage down to whatever people will work for?

Then you're back to the problem of paying millions of Americans less than a living wage.

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Right. Well, then, we just shouldn't raise it?

That's one way of looking at it. But the real world is more complicated than Economics 101 or price floors or supply and demand curves would have you believe. First of all, while the minimum wage is occasionally bumped up, it is lower now in real terms than it was 40 years ago. The $1.60 hourly minimum wage of 1968 would be around $10.50 if it had been indexed for inflation.