Question

The current federal minimum wage is $7.25 per hour, but in his State of the Union address, President Obama proposed an increase to $10.10 per hour.

The Congressional Budget Office (CBO) reported, "Increasing the minimum wage would have two principal effects on low-wage workers. Most of them would receive higher pay that would increase their family’s income, and some of those families would see their income rise above the federal poverty threshold. But some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly."

Managers may decide to use more technology to reduce labor costs. For example, you can order a product and never talk to a person. You use your iPad, computer, or telephone.

1. Raising the federal minimum wage would have advantages and disadvantages from your own opinion.
2. What impact might a higher minimum wage have on the employee and the overall economy, specifically for the minimum wage becoming $15 hour in California?

Answer 1

Rising federal minimum wage would have a disadvantage from my opinion. This is because, just like the way we consider value while purchasing products, companies too consider value when purchasing human capital.

We need to consider one simple fact and ask ourselves “Has the skill and contribution level of humans increased to justify an increase in minimum wage?”

In most cases the answer will be “No.” As a result, increasing minimum wage will result in poor value proposition from human to companies and as a result, the organizations may choose to layoff large number of employees. This will give rise to unemployment and may even give rise to crimes and other negative impacts within the state and the country. As a result, I do not think increasing minimum wage through federal system is a good idea.

Minimum wage is $15 in California. Is the California employees more capable than the rest of the country? Not necessarily. Then why is the minimum wage this high? These are some of the questions we need to ask.

One obvious answer is that the cost of living is high in California. This is due to higher degree of transaction between people and organizations. There is also higher level of consumption and thus the minimum wage can be justified to some degree. In all fairness, the minimum wage adjustment should be done based on the market condition. Government interference may be alright but only to set a minimum value for the wage. For that $8 per hour is a decent figure for a country like USA.

As described above, unnecessary hike in minimum wage can likely have a negative impact on employees (layoff, firing, challenging work conditions) and companies (higher cost, bankruptcy, low profitability) alike. Thus unless the economy organically is ready, we should not increase the minimum wage.