If you have ever held a job before receiving a college degree, then you are aware of a phenomenon in the United States called ‘minimum wage.’ It is the customary pay rate of pre-college teens and those unable to gain an education of a high school diploma or higher. Employers, employees, and the government have gone back and forth on the merits of raising the minimum wage. Recently, president Obama has proposed raising the minimum wage from the present level of $7.25 an hour to $9.00 an hour, an increase of nearly 25%.

Upon initial examination, some may wonder why the government would ever have to debate the merits of raising the minimum wage, especially since an increase of a mere $1.75 an hour seems to be a rather trivial and minor increase. Indeed, that is exactly how the president wishes you to see the proposal. But when there are millions of people working billions of hours a year, that extra $1.75 starts to add up. The president of the Economic Policy Institute says that the aggregate wage increase would amount to $22 billion a year.

If that sum of money were dispersed among large corporations that have cash coming out their ears (e.g. Apple, Microsoft, etc.), then the law would may not have such a large impact. The problem is that the firms that rely heavily on low-wage labor to succeed will be hit the hardest. Retailers, such as Walmart, Target, and Costco are pinched every time the federal minimum wage rate increases.

Worse than that, small businesses feel the biggest bite in their profits. That is why Minnesota has a statute that stipulates that employers who do less than $625,000 in revenue do not have to comply with the federal rate and may pay their workers $5.25 an hour.

It raises the age-old question: Does society prefer fewer well-paying jobs or more jobs for with reduced wages? The question is only difficult to answer if the benefit of going either way is proportionately equal. The question is very easy to answer when only a modest increase in wages (such as the current proposed hike) would tear $22 billion out of the economy to provide new jobs. For every four people that receive a pay increase, approximately one person could have received a new job.

The president also makes a fatally-flawed assumption: workers’ hours will remain constant. Contrary to popular belief, business owners generally know what they are doing. When wages must go up and there is no more money to go around, that means hours go down and/or people get laid off.

If employers do well, they do not shy away from increasing the wages of their workers. Workers have a stake in the firm they work for and benefit from the firm’s success just as the other stakeholders do.

I guarantee you that if the firm does not increase wages over time, their workers will let them know about it.

By: Aaron Overfors

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