Federal Minimum Wage

There are several arguments against the federal minimum wage. Among them is the argument that the federal minimum wage hurts consumers by causing a rise in inflation.

The minimum wage was first established in the late 1930s, and was controversial. The nation was in the middle of a depression, and critics of the legislation establishing a federal minimum wage argued that it would set the nation back in its path to economic recovery because it would increase labor costs too much. The economy did eventually recover, but critics remain convinced that the minimum wage’s contribution to inflation is a drag on the overall economy, and that the free market should be allowed to determine how much workers are paid.

What is inflation, anyway?

Inflation is an increase in the price level of goods and services in an economy over months, years or decades. As the price level increases, the amount of goods or services a single unit of currency, i.e. dollars, pounds, euros, can buy decreases, representing a deterioration in the purchasing power of that unit of currency. In general, inflation is measured by a general price index, such as the consumer price index, which tracks the costs of goods and services generally needed by everyone.

Inflation can have a number of impacts on the economy, some good and some bad. Some of the positive impacts of inflation are that it can mitigate the severity of economic recessions and it can also provide some debt relief in cutting the true cost of debt. The negative impacts include volatility in the value of money, which can lead to economic instability, discouragement of saving and investment and scarcity of goods if inflation introduces enough unpredictability into the market to encourage hoarding by consumers.

Labor costs can be a key contributing factor to inflation. By increasing the amount it costs in labor to produce a good or a service, the employer may raise his or her prices to offset his loss, passing the increased costs along to the consumer. Inflating the price will make the buying power of the U.S. dollar decrease.

If the employer cannot pass along the cost of the labor increase to the consumer because of competitive pressure or other factors, that employer will take a loss in his or her profits, which may impact the employer’s ability to purchase new equipment, hire more employees and otherwise expand his or her business.

The common consensus

Today, most economists tend to agree that increases in the federal minimum wage have some impact on inflation, but that the extent of that impact is debatable.

The commonly accepted argument tends to be that labor costs are just one of many factors that can contribute to inflation, such as materials cost, service and utilities costs and tax burdens. Because minimum wage workers make up only a small portion of the overall economy, boosts in their wages, especially small ones, are likely to have a very small impact on the economy as a whole, where as other factors that touch all aspects of the economy, such as a tax hike, are likely to have a bigger impact on pushing inflation upward. Another key argument against the idea that increasing the minimum wage causes rises in inflation is the fact that the vast majority of minimum wage workers are not full-time workers. Because most minimum wage earners are only part-time, the impact of an increase in the federal minimum wage is likely to be marginal.

During an economic downturn, it’s more likely that increases in labor costs are more likely to contribute to inflation, as these costs are likely to take a bigger chunk out of employers’ budgets when business is bad. However, competitive pressure and the scarcity of consumers during a recession or depression may have a mitigating effect on labor’s impact on prices, as businesses will keep prices low to appeal to the fewer customers available. Evidence of this can be seen in the current recession, where the minimum wage has risen drastically, but other pressures have kept the rate of inflation low.

Some economists argue that indexing the minimum wage to the consumer price index, so the minimum wage rises with prices and in a more gradual manner than the current system, where the minimum wage rises at the whims of Congress, would have an even smaller impact on inflation. The minimum wage rose by almost two dollars over the past three years after staying stagnant for a decade. If the minimum wage had risen gradually with inflation over this time period, the impact of increases in the minimum wage on inflation would likely have been less than boosting it by large amounts over the past three years has done.

Overall, while it appears that an increase in the minimum wage likely contributes somewhat to inflation, the impact is likely acceptable by most parties in exchange for the benefits it offers lower income workers.

The current U.S. minimum wage is $7.25 per hour, and applies to just about all workers in the U.S. Employers are expected to follow the minimum wage law, and when they don’t, the government is expected to step in and ensure the law is enforced and any violations are dealt with appropriately.

The federal minimum wage falls under the Fair Labor Standards Act, which was passed more than 70 years ago. It applies to all businesses with more than $500,000 in revenue and many businesses that do not. There are some exemptions to the federal minimum wage. For example, restaurant servers are not required to be paid the federal minimum wage because their tips are believed to more than make up the difference. Also, some mentally and physically disabled workers are not required to be paid the minimum wage either.

Enforcement of the federal minimum wage under the FLSA lies with the Wage and Hour Division. Employers are required to post notices concerning the federal minimum wage and various other workers’ rights in a prominent place in their places of business.

Types of violations

There are a variety of ways in which a business can violate the federal minimum wage and run afoul of the Wage and Hour Division. Here’s a few of the most common violations:

• Employers are guilty of violating the federal minimum wage law if they force workers to pay for uniforms, breakages or register shortages, and these charges cause the workers’ average hourly pay to fall beneath the federal minimum wage.
• Employers violate the federal minimum wage law if they force employees to hand over some of their tips to the business, and this pay out drags the employees’ pay under the federal minimum wage.
• Employers violate the federal minimum wage if they require their workers to work for only tips or commission, and this forces their pay under the federal minimum wage.

What else does the FLSA cover?

In addition to the federal minimum wage, the FLSA covers a variety of other employment issues. The FLSA forces employers to pay overtime, set at one and a half times the normal rate of pay, for every hour a worker labors over 40 hours per week. The FLSA regulates the employment of minors, setting limits on how many hours they can work each week. Also, the FLSA sets rules for documenting wages and pay that employers are required by law to follow.

Enforcement action

The U.S. Department of Labor, which oversees the Wage and Hour Division, has a variety of penalties at its disposal to punish violators of federal minimum wage law. If an employer is found guilty of violating the federal minimum wage law, the Department may require changes in the employer’s labor practices and they can also make sure the employer pays back wages due to the employees.

Employers who are found to be willful violators of the minimum wage can be prosecuted in criminal court and fined up to $10,000. Second offenders can be subject to jail time and can also be subject to a $1,100 per violation penalty.

A second conviction may result in imprisonment. Employers who willfully or repeatedly violate the minimum wage or overtime pay requirements are subject to civil money penalties of up to $1,100 per violation.

If an employer is determined by the Department of Labor to have violated the minimum wage law, he or she may file an appeal within 15 days of receipt of notice. A hearing will then be held in front of an administrative law judge.

Labor lawyers

Workers who feel their minimum wage rights have been violated should get in contact with the Wage and Hour Division of the Department of Labor. Laws exist to protect whistleblowers, so employees who consult with the Wage and Hour Division should not fear retaliation. Workers whose minimum wage rights are violated by an employer may be awarded punitive and compensatory damages by the courts. A significant segment of the nation’s attorneys devote their practice to litigating labor issues. These lawyers tend to shy away from individual actions, unless they’re working pro bono, but will take up a large case where a company has engaged in large scale violations of the minimum wage law or laws pertaining to overtime compensation.

While employers may seem to hold all the cards in labor and wage disputes, minimum wage workers actually have a powerful ally in the Department of Labor, and can seek redress of their grievances.

The federal minimum wage exists to provide workers in low skilled jobs with a basic income that can allow them to provide for the needs of themselves and their families. Since it’s inception in the late 1930s, there has been a debate about the minimum wage’s ability to accomplish this end, and it’s efficiency in doing so.

Some criticisms of the minimum wage are that it actually leads to increased unemployment as employers are forced to cut jobs to keep up with increased labor costs, can drive up inflation, and that the minimum wage is not updated often enough to allow it to provide a basic income necessary to cover the needs of the people it is intended to help.

Politicians and economic experts have come up with a few alternatives to the minimum wage, which they have proposed over the last few decades. Proponents of these alternatives to the minimum wage say these new options would more effectively and efficently address poverty than the minimum wage, and would not have as many adverse economic side effects as the minimum wage. Some of these alternatives to the minimum wage have been tried with varying degrees of success in other nations, and some U.S. states have also experimented with these options.

Providing a refundable tax credit

This minimum wage alternative is already in practice to some degree in the form of the Earned Income Tax Credit. The EITC provides a tax credit to low income workers, even if they have no federal income tax liability. For example, if John is a low income worker who had $1,000 in federal taxes withheld from his paycheck last year, but his tax liability comes to zero when he files his taxes and he also qualifies for a $500 EITC, John will get $1,500 in a tax refund, even though he only paid in $1,000. A refundable tax credit program would be like the EITC, but on a larger scale. Once again, a key argument in favor of this over the minimum wage is that it would be less likely to result in higher labor costs to employers, unlike the minimum wage.

Providing a basic income

One leading alternative to the minimum wage is for the federal government to provide a basic income to its citizens. Under this system, which resembles Social Security, the federal government would provide each citizen with a periodic allocation of money that should meet the basic living needs of a person or family. The basic income would not be subjected to a means test, meaning that the richest and the poorest citizens would receive the funding.  Economists and other experts in favor of a basic income scheme say that a basic income plan based on a wide and varied tax base would be much more economically efficient than the current federal minimum wage, which they say unfairly burdens employers with a high marginal tax, which creates losses in efficiency and eventually, more unemployment.

The basic income is one of the older alternatives to the minimum wage, and has some pretty high profile supporters such as John Kenneth Galbraith, Milton Friedman and James Tobin. In the late 1960s, more than a thousand economists signed a petition to the U.S. Congress calling for a basic income system.

A potential drawback of the basic income would be the disincentive to work it would provide. Some economists argue that if citizens are provided a basic income, many will choose not to work and to make do on subsistence income.

Providing guaranteed minimum income

A guaranteed income is a modified version of the basic income scheme. There are more conditions to this minimum wage alternative, and it would be subject to a means test, whereas the basic income would not. Other stipulations for the guaranteed minimum income include requiring recipients to participate in community volunteering or requiring them to have jobs. These requirments may placate some critics who feel that basic income or guaranteed income schemes would result in an increased number of people choosing not to work.

Let’s make a deal

In some countries, no minimum wage is required by law to be paid by employers. Instead, the minimum wage is set in different industries by a collective bargaining agreement. Sweden is one country where this system is at work. The most recent round of negotiations occurred in 2004, and resulted in a seven percent increase in wages in most industries over a three-year period.

While some of these alternatives may look appealing, it’s highly unlikely that the U.S. government will repeal the minimum wage any time soon. Instead, it’s likely that the U.S. government may seek to combine some of these options with the existing minimum wage scheme.