Analyzing the Socio-Economic Impacts of the US Federal Minimum Wage

Abstract

With United States president Joe Biden announcing plans to raise the federal minimum wage to $15 an hour, conversations surrounding minimum wage laws have resurfaced yet again as businesses and policymakers look to get ahead of its effects on the economy. This paper will analyze the economic and social impacts of the US federal minimum wage by drawing on economic models and empirical data from sources such as the Congressional Budget Office and Bureau of Labor Statistics. Various studies have shown that raising the minimum wage would result in large-scale unemployment effects, severely hurting the economy in the midst of the COVID-19 recession. Firstly, minimum wage policies fail to combat poverty and instead induce cost-push inflation, reducing real wages. Secondly, many contract and self-employed workers are not covered by minimum wage regulations at all. Thirdly, by directing those at the lowest end of the wage spectrum into the ranks of the unemployed, minimum wage laws have an unfairly disproportionate effect on the impoverished, thereby exacerbating income inequality. Finally, from a social perspective, minimum wage policies violate workers’ freedom of contract by interfering with their employment seeking process, and the existence of minimum wages can weaken workers’ negotiation power in wage bargaining. This weakness is especially evident when considering that there are many other alternatives in safeguarding workers’ rights such as workplace safety laws and trade unions. In light of these negative impacts, this essay warns policymakers to not be too optimistic towards the minimum wage and encourages governments to seek other alternatives to protect workers’ rights and secure higher wages. By analyzing the potential drawbacks of the minimum wage, this paper addresses a gap in the existing literature, which mainly focuses on the benefits of the policy. Therefore, not only will this paper contribute to existing work in the field of labor economics, it also provides a more holistic, well-rounded perspective of the federal minimum wage.