15 Major Advantages and Disadvantages of Minimum Wage for Workers

According to information provided by the World Economic Forum, the countries with the highest minimum wage in the world today are Australia, Luxembourg, France, and the Netherlands. The United States currently ranks ninth on that list, falling behind Japan, Canada, and the United Kingdom for the amount of wages in terms of purchasing power that is available.

The hourly rate in Australia yields the equivalent of $10.78 in purchasing power, which makes it six times higher than what Russians earn at the same level.

Supporting workers in low-paid positions is a critical objective for governments around the world, especially after the economic crisis that began in 2007 uncovered the disparity that existed for income levels globally. About three decades ago, economists were confident that higher minimum wages had a negative impact on jobs. The data we have collected since then suggests that this is not the case.

The weight of the evidence to date suggests that minimum wage increases run concurrent with positive employment effects. Washington State has the highest-ranked economy in the U.S. despite consistently having the highest minimum wage requirements too.

Here are some of the specific minimum wage pros and cons to consider when looking at this subject.

List of the Pros of a Minimum Wage

1. A minimum wage reduces the amount of stress employees face each day.
For the typical family of four in the United States, both parents would need to work a 77-hour work week at the minimum wage to earn what would be considered a living wage in the country. A single parent with two children would need to work the equivalent of 3.5 full-time jobs to earn a living wage on $7.25 per hour. In all family sizes, the living wage exceeds the poverty threshold to identify need. Even in Washington State, only 63% of the living wage before taxes is covered by this amount.

When you have a minimum wage that actually meets the needs of a family, then it can reduce the levels of stress that workers face each day. There is no longer a question of wondering which expenses to pay during the month to make ends meet. That means their productivity levels can actually rise.

2. A minimum wage works to reduce income inequality.
By creating a minimum wage that businesses must pay to their workers, it balances out the labor expense from the higher-earning employees in the C-Suite. There are several CEOs in the United States that earn over 200 times what their entry-level employees earn while working a similar number of hours. Having a fair minimum wage that covers living expenses can provide an incentive to work that is healthier than the ideas of a universal basic income or social welfare programs.

3. A minimum wage can create economic growth at the local level.
Most of the economies in the world today are based on consumer spending, whether it is measured at the local or national level. When there are more wages available to spend in a community, then it increases the levels of demand for specific goods and services. That outcome results in higher levels of business revenue, which can then become the foundation for job growth. Even the Congressional Budget Office notes that raising the minimum wage would lift 900,000 households out of poverty, even though there would be costs to the overall employment figures.

What good is having a job if you need to use food stamps and other welfare programs to cover your basic living expenses?

4. A minimum wage typically impacts the service sector.
The reality of minimum wage structures around the world is that most employees who earn this amount are working in a service sector. These industries are some of the easiest places where the cost increase can be passed along to consumers in the form of a slightly higher price. Paying more also lowers staff turnover rates because it keeps the job market competitive. That reduces the costs of recruitment and training, which can sometimes offset the increase in labor expenses that are paid throughout the year.

5. A minimum wage allows for workers to invest in their education.
Although employers in the United States spend $22 billion per year on tuition assistance, this benefit does not pay for the entire cost of an education. 29% of companies in the U.S. do not offer this benefit either, which typically offers $5,250 per year as a maximum benefit. Offering a minimum wage that is higher would make it possible for employees to pay for their tuition costs, especially with tuition assistance, to help cover the 6 million open jobs that are available at any given time in the country. The skill gap between what employers want and what workers receive from their educational institutions could be reduced with this change in society.

6. A minimum wage can benefit a business in multiple ways.
Outside of the lower turnover rates and training costs that come with a higher minimum wage, it is easier to support community functions with higher wages too. People who are comfortable with their salary are more likely to volunteer their time to charitable causes in their community. It gives a company a new chance to give back, including specific days where workers can be paid to help charitable organizations during a weekday. You ultimately have more flexibility when wages are higher, even though there are some disadvantages to consider when the government requires that you pay workers more.

7. A minimum wage improves tax revenues for a community.
Most minimum wage workers do not pay an income tax in the United States because their income does not qualify. Even if withholdings occur, a complete refund that sometimes goes above the amount that is due becomes possible. By offering a higher wage to workers, a larger pool of taxpayers is created to support local, county, and state projects in addition to the government pool that is available. That means there are more revenues available to help those who fall on hard times and cannot find work for some reason.

List of the Cons of a Minimum Wage

1. A minimum wage creates an unfunded mandate that targets business owners.
Although there are potential economic benefits that would occur with a minimum wage in place, it is also important to remember who pays for it. There are rarely taxpayer supports that help businesses cover the additional labor expenses of this policy. When it rose in 1996, the new law cost more than $4 million per state to implement. Passing new legislation that would accomplish the same thing would be much more than that, especially if the $15 per hour rate is the one approved in the U.S. in the future.

2. A minimum wage increases the cost of goods and services.
Labor is already the most significant budget item for the average business. If the government forces them to pay all of their workers more, then they must either raise prices, reduce their employment opportunities, or both to stay in compliance with the mandate. It is not uncommon to see unemployment rates rise immediately after a new mandate is put into place. That means the people who can ill-afford to lose a job are often the first to go since smaller companies decide to operate with fewer workers.

3. A minimum wage penalizes companies that perform labor-intensive work.
The businesses that are capital-intensive industries receive the greatest rewards when a minimum wage mandate passes because they receive the lowest impact to their budget. Labor-intensive industry see spikes in their cost profiles because each worker requires a higher wage. The added expenses can be enough to drive customers away, potentially forcing more small business owners into bankruptcy.

4. A minimum wage can lead to higher levels of job outsourcing.
If the cost of labor locally is $11.50 per hour, is it wiser to hire someone from the community or to outsource the job to someone who might earn $7.25 per hour elsewhere? It is not unusual for offshoring to occur when a minimum wage increase occurs because jobs that are overseas require less of a labor charge without creating a negative impact on a person’s way of life. Why pay $11.50 per hour when someone in southeastern Asia is perfectly happy earning $1.25 per hour to do the same work at an acceptable quality.

5. A minimum wage does not guarantee relief from poverty.
Minimum wage requirements do help the workers that can keep their employment. It will also lead to an increase in unemployment in the days and weeks after the policy is implemented. There is more of an incentive to work with the higher salary, but it can also force more people into social assistance programs because they have lost their job.

6. A minimum wage devalues the experience of veteran employees.
When Amazon announced that they were going to increase the minimum wage for all employees to $15 per hour, the result benefited over 250,000 workers. Some warehouse workers discovered that the shift in salary meant that they would be earning less over the course of the year because there would be an elimination of bonus structures and future stock grants. Those who were already earning more than $15 per hour would receive a minimal increase in their wages as well, which acts as a disincentive to their experience. Why work hard for your pay after 10 years of service when someone off the street can earn just as much as you are immediately?

7. A minimum wage can increase the cost of living for households.
Washington State may benefit from a strong economy and one of the best economies in the country, but it is also one of the most expensive places to live in the U.S. as well. The median home cost in the state is $370,000. If you focus only on the Seattle area, then that price rises to more than $761,000. That is 47% more expensive than a city like Bozeman, MT. Cities often see the highest spikes in minimum wage costs because they can absorb the added expenses easier. That means rural communities might find higher costs without the added benefit of better wages since agricultural work is sometimes treated differently.

8. A minimum wage can encourage under-employment.
Just 7% of families living in poverty have one person in the home working in a full-time position. People sometimes choose to be under-employed because they have different priorities. If someone only wants to work part-time because they coach soccer, volunteer at their child’s school, and work in the gig economy, then their work does not factor into the overall data reliably because of their life structure. Higher minimum wages could encourage more families to take this stance, which would further skew the collected data.

The pros and cons of a minimum wage show that it is possible to pay workers a livable wage without creating an overall negative impact on the economy. It allows entry-level workers to have an opportunity to have buying power that is meaningful. Although it would initially result in some job losses, the net gains for society show that the benefits often far outweigh the disadvantages. We must support the individuals who become outliers in job retraining, education, and other areas to ensure they can one day take advantage of these benefits as well.