In the United States, the minimum wage is a government-imposed pay floor that forces employers to pay employees a certain amount for an hour of work. The U.S. Department of Labor states that the federal minimum wage is $7.25 an hour for work performed as of July 24, 2009, up from a minimum of $5.15 that existed before 2007. Increasing the minimum wage can be advantageous in some ways and harmful in others.
Helping Low-Income Workers
The minimum wage is a controversial economic and political topic. Proponents and opponents are likely to disagree on the advantages and disadvantages of changes in the minimum wage. While some workers who make the minimum wage are young students and part-time workers, there are many workers who help support families with minimum-wage jobs. A potential benefit of increasing the minimum wage is that it boosts the income of low-income workers who earn an hourly wage at or below the minimum and helps them make ends meet. In addition, consumers who have more income will tend to spend more which can helps drive economic growth.
A possible disadvantage of increasing the minimum wage is that it could have a detrimental affect on employment. If companies suddenly have to pay employees more than they did in the past, they may decide to hire fewer employees or lay off workers. This could lead to higher rates of unemployment and more competition for jobs. In a 2008 article titled "Behind the Minimum Wage Debate," CNN reports that unemployment increased during the late 2000s, which coincided with increases in the minimum wage, although it is not clear how much of an impact the minimum wage itself had on employment.
Countering the Impact of Inflation
The cost of goods ands services tend to increase (inflate) over time, so if the minimum wage does not adjust upward periodically, it becomes smaller and smaller relative to the cost of living. In other words, if the minimum wage doesn't go up over time, people making the minimum wage become poorer and poorer. Raising the minimum wage can counter the erosion of wages due to inflation. According to CNN, President Obama has suggested changing laws to adjust the minimum wage automatically to account for inflation.
Another potential drawback of hiking minimum wage is that it could potentially reduce the profitability of businesses. If a business has to pay more for labor, its profits will fall. Businesses might respond to higher costs by increasing prices, putting upward pressure on the inflation rate.