There are few issues that have embattled the nation ahead of the 2016 presidential election more so than the minimum wage debate.
The line in the sand has been drawn
On one end of the spectrum we have 3.3 million hourly wage workers, or 4.3% of the workforce, that earned at or below the federal minimum wage in 2013, according to data from the Bureau of Labor Statistics. Note that this data doesn't include workers who earn the minimum wage in a state that currently pays out more than the federal minimum of $7.25 per hour. Include these individuals, and we're probably talking about millions of additional workers making minimum wage.
Minimum wage workers, or those making close to minimum wage, say they need a "living wage." By this, workers mean they need a wage that would cover life's basic living expenses, such as rent, food, electricity, and so on. The current federal minimum wage would only net workers $15,080 per year, before taxes, if they worked 40 hours per week. In comparison, the average price for rent in the U.S. in 2013 based on data from ApartmentList.com, was $1,231. That works out to $14,772 per year, and it doesn't leave much of anything left over for minimum wage workers.
On the other end of the spectrum are skeptics who abhor the idea of upsetting the economic balance of paying people in a commensurate fashion with their skill set. Although there is no concrete formula that says higher skills will command a better wage, it tends to work this way more often than not. Boosting the minimum wage could upturn this balance and cause a number of unwanted repercussions.
But fasten your seat belt, because the debate over a living wage is about to heat up even more.
Bernie Sanders champions a better than doubling of the federal minimum wage
Late last month, independent Sen. Bernie Sanders of Vermont, along with House Reps. Keith Ellison (D-Minn.) and Raul Grijalva (D-Ariz.), introduced legislation into Congress designed to phase up the federal minimum wage to $15 per hour by 2020 -- more than double where it is now. The bill would also close the loophole under the current federal minimum wage that allows tipped workers to earn as little as $2.13 per hour.
As Sanders opined:
I think if you work 40 hours a week, you have a right not to live in poverty. The current federal minimum wage is a starvation wage. It's got to be raised to a living wage.
To some degree, Sanders has a point. In addition to the rent example, if the federal minimum wage had kept pace with inflation and productivity growth since 1968, minimum wage workers would currently be paid about $26 per hour! To date, Seattle, San Francisco, and Los Angeles have all passed legislation to boost the minimum wage in their respective cities to $15 per hour over the coming years.
How a $15 minimum wage benefits workers and businesses
What would a $15 federal minimum wage and a closure of the tipped-worker loophole really mean?
For starters, it would boost wages for the 62 million workers currently making less than $15 per hour. Boosted wages should, as implied, allow workers to meet basic life expenses. But, there are more potential benefits than just higher wages for workers.
Businesses could benefit from the trickle-down effect of these higher wages. Lower-income consumers could suddenly have disposable cash to spend, and cost-conscious retailers such as Wal-Mart could find their business get a substantial boost.
Beyond the trickle-down effect, workers and businesses could benefit from a combination of stress relief and improved psyche. Earning a higher wage could encourage workers to try harder at their job and fight harder to keep their job. Understanding that at $15 per hour there could be unemployed individuals just itching to take their job, minimum wage workers could take more pride in their work. This attitude shift, along with the relief of possibly not living paycheck to paycheck, may be a net positive for the worker and businesses that benefit from improved productivity.
Sanders' plan also has plenty of potential flaws
Although Sanders' plan to raise the federal minimum wage for millions of workers makes sense on paper, its practical implementation comes with a number of unforeseen flaws.
One of the problems of boosting the minimum wage that typically flies under the radar is that wages need to go up for more than just minimum-wage workers for the skill-pay balance to remain intact. What this means is that a manager making $12 an hour now can't simply make $15 an hour if the newly introduced legislation passes. It doesn't make sense to have new hires making as much as long-tenured and/or executive position employees. These are costs that minimum wage proponents and businesses forget about.
Another big dilemma is that wage inflation will probably be dealt with in one of two possible ways: through cuts in jobs or hours, or by countering inflation with inflation.
In some instances, employers could simply choose to let workers go to keep their costs under control, or they may wind up cutting back their hours. In a 2013 interview with CNBC, Jamie Richardson, the vice president of fast food establishment White Castle, suggested that a $15 federal minimum wage would force his company to close nearly half of its locations and lay off thousands of workers.
If businesses don't want to cut their staff, they can choose to do the next best thing: make their customers or staff pay for the increase. For example, businesses can choose to cut back on perks given to their employees, such as paid parking, gym memberships, mass transit discounts, or even retirement benefits like a 401(k). With respect to consumers, some businesses in Seattle have begun tacking on a "living wage surcharge." MasterPark, an airport parking service in nearby SeaTac, now adds $0.99-per-day charge for consumers and makes sure to separate the charge out on consumers' receipts to ensure they understand where the higher fees are coming from.
And price inflation isn't limited to just standard businesses. The cost for rent and practically every other good or service imaginable could rise in commensurate fashion with the proposed wage increase. Within a decade, we could be right back in the same situation we are now, just with a higher federal minimum wage.
But arguably the biggest concern with raising the federal minimum wage so drastically is that it could remove the incentive for current minimum wage workers to learn skills that would allow them to move up the economic ladder. If workers are suddenly making enough to cover their basic expenses, they could lose their drive to learn new skills and hurt business productivity. By displacing the natural skill-pay balance, Sanders' bill proposal could wind up backfiring.
So which side is right? I honestly couldn't tell you, because we're just beginning to see the initial impact of wage increases in Seattle. It's going to be a few years before we get a genuine feel for whether workers making a higher wage are living happier lives and are more efficient in the workplace, or if the raises are crushing businesses and hurting productivity.
As for Sanders' $15 federal minimum wage proposal? With the presidential election coming up in November 2016, and Congress having unsuccessfully discussed legislation to boost the federal minimum wage to $9 or $10.10 per hour, I highly doubt that it'll find much, if any, support. This isn't to say a $15 federal minimum wage should be struck off the table completely, but lawmakers are going to want to see concrete evidence that it's working in Seattle, Los Angeles, and San Francisco before even thinking about rolling out such a dramatic increase in the federal minimum wage on the national level.
Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.