Will raising the minimum wage be good or bad for America?

Los Angeles has agreed a city-wide minimum wage of $15, while New York is being urged to follow suit. Will it boost incomes, or simply increase unemployment? Matthew Partridge investigates.


Protestors have got their wish in Los Angeles

Los Angeles has agreed a city-wide minimum wage of $15, andNew York is being urged to follow suit. Will it boost incomes, or simply increase unemployment?

What's going on?

Los Angeles City Council has approved preliminary plans, expected to be formally approved, to raise the minimum wage to $15 per hour (£9.60/hr at current exchange rates) by 2020. While some workers in small firms would not be covered until 2022, the levels would be indexed to inflation from then on. This would be two-thirds higher than the current Californian minimum wage of $9/hr, which is not automatically adjusted for rising prices.

The move follows similar steps by Seattle and San Francisco (which are both due to come into full effect in 2019). New York is also considering raising the minimum wage for workers in the fast-food industry.

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There are even moves by some in Congress to raise the national minimum wage level to $12/hr. However, the New York Times notes that the Republicans, who control both houses, are opposed "to even considering an increase".

What about the rest of the US?

Minimum wages are decided at the local, state and national levels, with workers getting the highest rate. The most generous state is Washington, with a minimum wage of $9.47 an hour. However, in two-fifths of states (including Texas) workers are only entitled to the national rate of $7.25 an hour, a level last raised in 2009.

Meanwhile, workers who receive tips are only entitled to $2.13 per hour, although employers have to make up any difference if total earnings fall below the minimum. Due to inflation, the US national minimum wage actually peaked in 1968 when it stood at $1.60 per hour, equivalent to $8.54 per hour today (though a few workers were exempt), notes Pew Research Centre.

Ben Casselman of 538.com points out that the extra cost of living in big cities means that Seattle's current rate of $11 is effectively less than the US minimum.

Why should the minimum wage rise?

The main argument for increasing the minimum wage is to reduce inequality. Overall, 3 million workers are paid the national minimum wage, with a further 20 million classed as "near-minimum wage workers".

Raising their wages would improve their standard of living, reducing inequality. And this is a significant number of people we're talking about around 46% of workers in Los Angeles earn less than $15 an hour.

Supporters point out that such low-wage jobs are effectively subsidised by the state via tax credits and food stamps as Barry Ritholtz points out on Bloomberg View, a few years ago McDonald's generated outrage when it set up a website advising its staff on how to claim benefits. Overall, it's been estimated that the staff in the low-waged fast-food industry alone claim $7bn in benefits.

Could this backfire?

Critics argue that high minimum wages will end up pricing workers out of the market. Meghan McArdle argues that in the long run, "along with a net transfer of money from owners and customers to employees,there will also simply be fewer employees in some businesses". Forbes' Tim Worstall claims there is evidence that the minimum wage is causing an increase in the rate of restaurant closings in Seattle (which is also adopting a $15 minimum).

Another potential consequence is that it will force businesses to raise prices, pushing up inflation and reducing the purchasing power of workers. Indeed, a study by academics from the University of Washington and University of California, Berkeley suggest that prices will have to rise in Seattle by around 5% to compensate for the higher wages.

Are there similar debates in other countries?

Other countries are having similar debates. In Britain, there is a growing clamour to increase the national minimum wage (which has fallen in real value in recent years since it is linked to average wages, not prices). Many campaigners argue that levels should be brought up to that of the "living wage", currently estimated at £9.15 per hour in London and £7.85 outside the capital.

By contrast, Greece has slashed its minimum wage by 20% since 2012 (although the new government has pledged to raise it), in order to make the economy more competitive.

While defenders of the status quo in the US point that other developed countries have comparable rates, others dispute this. Indeed, the Economist calculated that, taking America's GDP into account, the minimum wage should be closer to $12.

Are there any alternatives to higher minimum wages?

One solution is to cut the taxes of lower-paid workers. Adam Memon of the Centre for Policy Studies thinks that "if low earners are taxed less, there will be less of a need to supplement post-tax incomes with in-work benefits and people who are out of work will have a stronger incentive to move into a job".

Another suggestion from the opposite part of the political spectrum is to increase the power of trade unions, so they are able to negotiate higher wages. While Germany did not have a national minimum wage until last year, collective wage bargaining has kept wage differentials low.

Dr Matthew Partridge

Matthew graduated from the University of Durham in 2004; he then gained an MSc, followed by a PhD at the London School of Economics.

He has previously written for a wide range of publications, including the Guardian and the Economist, and also helped to run a newsletter on terrorism. He has spent time at Lehman Brothers, Citigroup and the consultancy Lombard Street Research.

Matthew is the author of Superinvestors: Lessons from the greatest investors in history, published by Harriman House, which has been translated into several languages. His second book, Investing Explained: The Accessible Guide to Building an Investment Portfolio, is published by Kogan Page.

As senior writer, he writes the shares and politics & economics pages, as well as weekly Blowing It and Great Frauds in History columns He also writes a fortnightly reviews page and trading tips, as well as regular cover stories and multi-page investment focus features.

Follow Matthew on Twitter: @DrMatthewPartri