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World Finance, Feb 22 2013

The age old debate is a moot point; minimum wage increases do not stifle employment

Every time one politician or another proposes doing anything to the minimum wage, be it increase it, cut it, or scrap it altogether, financial and economic commentators go into a frenzy. The general consensus suggests even the most modest of increases will send unemployment skyrocketing and lead small businesses to bankruptcy. This line of argument is as old as minimum wage itself, and just not correct. President Obama has been the latest to start a campaign to raise minimum wage and the backlash has been seismic. He has been accused of populism and of practicing ‘zombie economics’. But this reaction is more ideological than fact-based, and results in fear-mongering. The economy will not collapse, the country will not go into another recession, small businesses will not fail on the back of a less than $2 per hour increase. ...

John Schmitt, from the Centre for Economic Policy Research in Washington, has just published a study that reviews the most significant research on the issue of minimum wage over the last decade and concludes that there is little evidence to suggest a decrease in employment following a hike in minimum wage. ...

Of course foreign competition is an issue, but wages in South East Asia, for example, are already so much lower than the current level of minimum pay in the US that this is hardly a new threat. “Most anything that can be outsourced to low-wage foreign countries already has been,” argues Nathan Lewis in Forbes. “It is a non-issue.”

Social issues must also be taken into consideration when discussing the minimum wage; this is one particular financial instrument that is not purely economic theory, but affects the livelihood of the majority of the population. Historically smaller businesses have been against raises in minimum wage because of the pressures of labour costs such increases inevitably bring. But the economic downturn has left America a deeply divided and unequal society; employers are keen to draw a line under the argument that higher wages suppress employments. Research suggests that taken inflation into consideration, a worker on the current minimum wage of $7.25 per hour is worse off than one who earned the base rate of $1.60 per hour in 1968. As a result small business associations across the country have spoken out en masse in support of higher and fairer wages. “It’s just really ridiculous to think that business owners can’t pay today at least as much as what they paid four decades ago,” says Holly Sklar, founder of Business for a Fair Minimum Wage. She suggests that high street businesses suffer the most if “the economy is falling apart around them. If the customer base is undermined because wages are so low, they feel it directly.” ...

A worker needs to be given the chance to cover all his bills, rent and eventualities without being left at the mercy of state handouts. So for Obama increasing the minimum wage is not just a way of boosting the lower income population in an economically dysfunctional society, it is also good policy. ...

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