American Economy Issue Paper

ECON 0858

Issue Paper #1

2/27/18

Student Name

(1) Position Statement Topic: Minimum Wage Laws

(2) Minimum wage laws have been debated as a chief topic among legislators and economists alike,

especially recently with Bernie Sander’s proclamation that it should be set to $15/hour. A higher

minimum wage can stifle the growth of small businesses, and affect millions by increasing

unemployment for unskilled workers, while a lower minimum wage may contribute to increased

poverty or a poor standard of living for some. Under President Trump’s new tax plan, decreased

income tax rates for consumers allows them to spend more money, which in turn will help small

businesses, who also reap the benefits of a reduced corporate tax and capital gains tax. Because

these changes may spur a growth in economic activity going forward, the current federal

minimum wage of $7.25/hour should not be increased nor decreased in order to properly assess

the effects of Trump’s plan. Moreover, all 50 states should adhere to the minimum wage in order

to properly assess its economic impact on the U.S. as a whole.

(3) Economic Arguments Against My Position:

a. An increased minimum wage allows unskilled workers to contribute more to the

economy.

i. If workers earning the current minimum wage can take home more money, they

are inclined to spend that money and contribute to small businesses and help

boost economic activity.

ii. Since 2012, the Fight for $15 movement helped low-wage workers gain $61.5

billion in annual raises through state and local minimum wage increases

(National Employment, 2016).

b. An elimination of the minimum wage will spur economic growth and create new jobs.

i. A minimum wage must be set above the equilibrium price of labor in order to

take effect, and its effects are seen through the U.S.’s unemployment rates.

ii. In 2015, unemployment averaged 5.26%, implying that those who were

unemployed could have been employed in unskilled jobs if firms could afford to

hire them (Bureau, 2016).

1. Lost gains from labor trade create a need for the unemployed to enroll in

government welfare programs, with 6.2 million Americans receiving $32

billion in unemployment compensation in 2016 (United States, 2018).

2. Low-wage workers receive retarded wage growth when there is a small

increase in the minimum wage, compared to if there was no increase

(Lopresti, 2015).

iii. Companies that outsource production will bring manufacturing back to the U.S.,

creating jobs and utilizing land more efficiently.

1. Foreign-owned firms in Mexico and Venezuela pay workers more than

their domestically-owned counterparts, which suggests that those firms

(including those owned by U.S. entrepreneurs) that outsource pay foreign

workers below the U.S. minimum wage but above the domestic

minimum wage, if there is one (Aitken, 1995).

2. If there was no minimum wage, American companies would be

incentivized to invest in domestic manufacturing due to lower labor costs

and recently decreased taxes on corporate income and capital gains.

3. In Mexico, the minimum wage of 88 pesos is equal to $4.67 USD.

c. Trump’s tax plan will shift money from the working class to the upper class in due time,

which calls for an increased minimum wage to compensate.

i. The tax cuts for the middle class are temporary while the corporate tax cuts are

permanent, which suggests that upon expiration, the middle class may face the

tax burden to compensate for an increased deficit.

ii. The elimination of personal exemptions for families with lots of children may

reduce their income (Finance Wire, 2017).

iii. Decreased corporate taxes will see the top fifth of the U.S. receive 70% of the

benefits, with 34% going toward the top 1% (Center, 2017).

iv. An increased minimum wage would shift the benefits from the top earners in the

U.S. to the working class, who in turn will increase their income which will

increase the demand for goods and services.

(4) Economic arguments for my position

a. The current minimum wage is low enough that it incentivizes workers to earn promotions

or educate themselves to receive better wages.

i. Only 1.8% of U.S. workers earn the minimum wage or lower, which implies that

the vast majority of workers are skilled or educated enough to earn a higher wage

(Bureau, 2018).

1. 98.2% of U.S. workers do not want to supply labor at the price set by the

minimum wage because they acquire skills or education in order to earn

a higher income.

ii. Many minimum wage jobs are temporary or age-sensitive, allowing teenagers

and college students to earn money and experience while they acquire an

education.

b. The black market for labor created by the minimum wage makes up for lost gains from

trade, which helps small businesses and workers.

i. Small businesses, such as pizza shops and family-owned stores, pay workers less

than the minimum wage to reduce the sunk cost of the price floor.

1. This reduces unemployment for unskilled workers, who are the designed

beneficiaries of the minimum wage law.

ii. A worker earning $7.25 an hour working full-time will take home roughly $6.20

per hour before entering the next tax bracket (which would decrease take-home

pay) (SmartAsset, 2018).

1. By comparison, a worker earning $6.50 under the table will have a

greater take-home income while the firm will reduce its cost of labor,

resulting in a gain from the trade.

c. Trump’s tax cuts will allow small businesses to easily access financing for capital,

inventory, and expansion, which will create more jobs without decreasing the minimum

wage.

i. American Samoa, which is not subject to the federal minimum wage, saw

cannery employment (which accounts for 14% of the workforce) decrease by

50% upon a minimum wage increase for cannery workers (Government, 2016).

1. Those in the cannery industry cited labor costs as a main challenge, with

one of the two canneries in the region indefinitely suspending operations

in 2016.

2. Trump’s tax plan counterbalances the current minimum wage by

decreasing corporate and capital gains taxes, allowing for growth.

ii. Trump’s plan echoes those of John F. Kennedy and Ronald Reagan, both of

whom implemented policies that created job growth.

1. Kennedy’s tax proposals, including slashing investment taxes on

businesses, were followed by 5% annual growth for 8 years following his

death.

2. Reagan cut the corporate tax from 70% to 28%, which was followed by

4-5% annual growth for 25 years (Kudlow, 2016).

3. Under Trump’s most recent proposal, businesses with more than 50

employees will no longer be required to pay the ACA-mandated fine per

employee, potentially saving small businesses tens of thousands of

dollars (Armour, 2018).

d. An arbitrary minimum wage established by the federal government transfers rights from

state governments to business owners, who will benefit from loosened restrictions on

what to pay workers.

i. States like New York, which will see a minimum wage increase to $15 by 2019,

would instead be able to elect to pay its workers $15, or the minimum wage, or

somewhere in between in order to allow businesses to survive.

ii. When New Jersey raised its minimum wage in the 1990s, low-income jobs like

fast food service no saw upward or downward trend in employment.

1. The same trend was observed in Pennsylvania at the same time despite

having a lower and unchanged minimum wage, which suggests that other

economic factors may affect unemployment besides wage laws (Card,

1994).

iii. The required country-wide minimum would incentivize states to seek minimum

wage alternatives that are more efficient, such as Earned income tax credits

(EITCs).

1. EITCs directly assist those who work part-time earning the minimum

wage, which alleviates poverty and unemployment.

a. EITCs structurally target low-income families in need, which

make it more effective than the minimum wage.

b. Subsidizing labor market earnings incentivizes those in need

(like single mothers) to enter the labor force, while reducing

labor costs for employers, thus alleviating poverty and

unemployment while promoting economic growth (Neumark,

2015).

2. In 2007 (the last time the federal minimum wage increased), of the

reported $11 billion in increased incomes, only $1.6 billion went to poor

families, the main targets of the minimum wage (Smith, 2013).

a. By comparison, $2.4 billion of EITCs saw $1.4 billion go to poor

families, a success rate of 58.3% compared to the minimum

wage’s 14.5% (Smith, 2013).

(5) Conclusion

The minimum wage has its place in society because there is a general, ethical belief that no

hardworking individual should live in poverty. The minimum wage’s side effects are numerous,

but the benefits and supplementary measures (EITCs, black market labor) to address the issue of

poverty create a diversified system where poverty becomes marginal. I find black market labor

interesting because it exists only to the extent that it can: if every firm employed people illegally,

then the government would notice and take action. I was unable to find any legitimate statistics

on illegal labor, so my assumption is that under-the-table jobs mainly exist in companies that

have enough employees to hide it from the IRS. In regards to President Trump’s tax plan, it

promotes supply-side economics that sometimes yield statistical results without practical results

that benefit those in need. In order to fully assess Trump’s plan, the minimum wage should stay at

$7.25 and be strictly enforced throughout the country because it allows two things: a fair

assessment of Trump’s economic policy, which certainly deviates from former President

Obama’s; and a less restricted entrepreneurial environment to complement the policy. A federally

increased minimum wage would likely create unemployment that would stifle the anticipated

progress of Trump’s plan, while a decreased or abolished minimum wage would, in the short run,

reduce wages and raise poverty levels, which creates a tangible and external cost to society

through increased spending on welfare programs and heightened crime rates. It will be interesting

to assess the economic effects of New York’s minimum wage increase to $15 in due time,

because then we will find out, to a certain extent, whether or not the Fight for $15 movement

actually holds economic validity under Trump’s plan. If so, perhaps my suggestions are

theoretically flawed and the U.S. will move forward with a massive increase in minimum wage.

Works Cited

Aitken, B., Harrison, A., & Lipsey, R. E. (1995, October 1). Wages and foreign ownership: A comparative

study of Mexico, Venezuela, and the United States. Retrieved February 27, 2018. Retrieved from

https://www.sciencedirect.com/science/article/pii/0022199695014101?via%3Dihub

This article was exactly what I was looking for when I looked for comparative data on wages paid

to foreign-owned companies. It was very focused, but I managed to find some information that

was useful.

Armour, S. (2018, Jan 04). Trump administration proposal would exempt small businesses from some

ACA rules; plan would allow insurance coverage that doesn't include law's mandatory

benefits. Wall Street Journal (Online) Retrieved February 28, 2018.

I used this source to reinforce my assertion that Trump’s tax plan would help small businesses.

Bureau of Labor Statistics. (2016, April). Characteristics of minimum wage workers, 2015. Retrieved

February 27, 2018. Retrieved from https://www.bls.gov/opub/reports/minimum-

wage/2015/home.htm

The BLS is a government entity so I consider it a reliable source for statistics.

Bureau of Labor Statistics. (2018). Labor Force Statistics from the Current Population Survey. Retrieved

February 27, 2018. Retrieved from https://data.bls.gov/timeseries/LNS14000000

I usually use the BLS for any papers that require statistics to back up claims. The BLS is a

government entity so I consider it reliable.

Card, D., & Krueger, A. B. (1994). Minimum Wages and Employment: A Case Study of the Fast-Food

Industry in New Jersey and Pennsylvania. The American Economic Review, 84(4), 788-792.

Berkeley Library. Retrieved February 28, 2018. Retrieved from

http://www.nber.org/papers/w4509

I used this article because it concluded that a raised minimum wage may not affect

unemployment as much as some people believe. I needed this information in order to suggest

that keeping the minimum wage at its current level is feasible because other economic factors

may affect unemployment.

Center on Budget and Policy Priorities. (2017, October 23). Corporate Tax Cuts Mainly Benefit

Shareholders and CEOs, Not Workers. Retrieved February 27, 2018. Retrieved from

https://www.cbpp.org/research/federal-tax/corporate-tax-cuts-mainly-benefit-shareholders-

and-ceos-not-workers

I used this source because I needed a reliable source to indicate that tax cuts to the wealthy hurt

the middle class. This would help me support my assertions in the “arguments against my

position” section.

Finance Wire, & Lanham. (2017, April 26). Pres. Trump's Tax Cut Plan; Trump Tax Plan: Repeal Death Tax

And Alternative Minimum Tax; Trump Tax Plan: Eliminate Tax Breaks For Special. Retrieved

February 27, 2018. Retrieved from

https://search.proquest.com/econlit/docview/1892444065/75AFA3B57E07437APQ/3?accounti

d=14270

I was excited to find articles through the Paley database that discussed Trump’s tax plan

because I thought the news was too recent to see these articles make it onto an academic

database. I used this source because it discussed my topic and it was found through Proquest.

Government Accountability Office. (2016, December). Alternatives for Raising Minimum Wages to Keep

Pace with the Cost of Living and Reach the Federal Level. Retrieved February 28, 2018. Retrieved

from http://web.a.ebscohost.com/ehost/pdfviewer/pdfviewer?vid=5&sid=20e094d0-620c-

4300-b82b-ad6892ea20bb%40sessionmgr4007

NOTE: The link I provide should immediately prompt a PDF download to view the article. I found

this information useful because I could link American territories to loosened minimum wage

laws to assess the effects.

Kudlow, L. (2016, September 17). Lawrence Kudlow: Tax Cuts, King Dollar and Growth: From JFK to

Reagan to Trump. Investors Business Daily. Retrieved February 28, 2018.

This was a good source for comparing previous supply-side policies to the current one to project

the economic impact of Trump’s plan. This article seemed biased but I found it through

Proquest, so the person’s assertions were likely grounded in fact or expertise.

Lopresti, J. W., & Mumford, K. J. (2015). Who Benefits from a Minimum Wage Increase? Retrieved

February 27, 2018. Retrieved from

https://search.proquest.com/econlit/docview/1684397764/12B33002BE8B44D7PQ/1?accounti

d=14270

I used this paper for two reasons. First, because it would go toward fulfilling my Paley database

quota (which I ended up exceeding to my own surprise, since articles on Google tend to be

opinionated). Second, because it supported the idea that minimum wage increases are

associated with poor results for those intended to benefit from the increases, and it used data

from 2005-2008 to support it. Most articles that support that minimum wage increases result in

unemployment use data from the 1900s.

National Employment Law Project. (2016, December). Fight for $15: Four Years, $62 Billion. Retrieved

February 27, 2018. Retrieved from https://www.pbs.org/newshour/economy/column-

minimum-wage-lowers-employment-teens-low-skill-workers

NOTE: I could not find a link to the report directly, so I used a PBS article that contains a link in

the first sentence (the word “report” is hyperlinked to the report I cited). I chose this source

because I was looking for research-related validity regarding the economic benefits of a $15

minimum wage. The report is vague regarding its methodology but it is considered legitimate

enough to receive attention from a broadcast outlet such as PBS, which I felt was valid.

Neumark, D. (2015, December 28). Reducing Poverty via Minimum Wages, Alternatives. Federal Reserve

Bank of San Francisco Economic Research. Retrieved February 28, 2018. Retrieved from

http://web.a.ebscohost.com/ehost/detail/detail?vid=8&sid=20e094d0-620c-4300-b82b-

ad6892ea20bb%40sessionmgr4007&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#AN=1

12004119&db=bth

This was probably the best article I found because it laid out the purpose and effects of EITCs

with statistics to back it up. I happily used those statistics in my argument for my position.

SmartAsset. (2018). Pennsylvania Paycheck Calculator. Retrieved February 27, 2018. Retrieved from

https://smartasset.com/taxes/pennsylvania-paycheck-calculator#U5U5dbGPSc

I used this calculator to estimate the take-home pay of a person working full-time earning the

minimum wage in order to compare the earnings with someone who works under the table. I

was not sure if I should cite it or not so I did it anyway.

Smith, S. (2013, April). An alternative to the minimum wage. Restaurant Business. p. 8. Retrieved

February 28, 2018. Retrieved from

http://web.a.ebscohost.com/ehost/detail/detail?vid=10&sid=20e094d0-620c-4300-b82b-

ad6892ea20bb%40sessionmgr4007&bdata=JnNpdGU9ZWhvc3QtbGl2ZSZzY29wZT1zaXRl#AN=8

6718186&db=bth

I used this article to reinforce the previous article’s assertion that EITCs are a more effective way

of alleviating poverty than the minimum wage.

United States Department of Labor. (2018, February 26). Unemployment Insurance Data. Retrieved

February 27, 2018. Retrieved from

https://workforcesecurity.doleta.gov/unemploy/DataDashboard.asp

As with the BLS, I use the Department of Labor for any information I can. This page has the most

up-to-date information that I can find usually.

Grade: 30/30

COMMENTS: The student makes strong arguments to support and oppose his/her

stated position. These arguments are made using a variety of high quality

resources on economic topics. Furthermore, economic theory on the minimum

wage and taxes that was covered in class is incorporated into the outline.