Can Europe learn from the US in raising the minimum wage for employees?

In my recent trip to the US to visit my business partner, we discussed many topics around employment in the US and in particular one very interesting subject was across President Obama’s call to raise the minimum wage to $15 an hour. Was this a good idea, what are the repercussions for small businesses, and importantly was there a better way to help low-income workers?

I imagined what would happen in the UK if the UK government decided to raise the hourly rate for unskilled labour, potentially this would be a time-bomb waiting to explode for SME’s.

Certainly an increase in the minimum wage raises the income of those who are employed, but it also raises the cost of hiring unskilled labour and can potentially reduce the number of people hired by businesses today. So there are winners and losers from this policy. Those who remain employed and receive higher incomes are better off, and those who would be employed if not for the increase in the minimum wage are worse off.

Here are five facts about the minimum wage and the people who earn it:

1: “Adjusted for inflation, the US federal minimum wage peaked in 1968 at $8.54 (in 2014 dollars). Since it was last raised in 2009, to the current $7.25 per hour, the federal minimum has lost about 8.1% of its purchasing power to inflation. The Economist recently estimated that, given how rich the U.S. is and the pattern among other advanced economies in the Organization for Economic Cooperation and Development, “one would expect America…to pay a minimum wage around $12 an hour.”

2: “Nearly half (48.2%) of the 3 million hourly workers who were at or below the federal minimum in 2014 were ages 16 to 24. An additional 22.4% are ages 25 to 34, according to the Bureau of Labour Statistics; both shares have stayed more or less constant over the past decade. That 3 million represents about 2.3% of all wage and salary workers. (See more about the demographics of minimum-wage workers.) States with minimum wage higher than federal minimum wage.”

3: “Twenty-nine states, plus the District of Columbia and nearly two dozen cities and counties, have set their own, higher minimums. State hourly minimums range from $7.50 in Arkansas, Maine and New Mexico to $9.47 in Washington state, according to the National Conference of State Legislatures. Together, these states include 61% of the nation’s working-age (16 and over) population, according to our analysis of U.S. Census Bureau data. Among the cities that have enacted even higher local minimums are San Francisco ($15 by 2018), Seattle ($15 by 2021), Chicago ($13 by 2019) and Washington, D.C. ($11.50 by 2016), according to the National Employment Law Project.”

4: “About 20.6 million people (or 30% of all hourly, non-self-employed workers 18 and older) are “near-minimum-wage” workers. We analyzed public-use microdata from the Current Population Survey (the same monthly survey that underpins the BLS’s wage and employment reports), and came up with that estimate of the total number of “near-minimum” U.S. workers – those who make more than the minimum wage in their state but less than $10.10 an hour, and therefore also would benefit if the federal minimum is raised to that amount. The near-minimum-wage workers are young (just under half are 30 or younger), mostly white (76%), and more likely to be female (54%) than male (46%). A majority (56%) have no more than a high-school education.”

5: “The restaurant/food service industry is the single biggest employer of near-minimum-wage workers. Our analysis also found that 3.75 million people making near-minimum wages (about 18% of the total) worked in that industry. Among near-minimum workers aged 30 and younger, about 2.5 million (or nearly a quarter of all near-minimum workers in that age bracket) work in restaurants or other food-service industries. But because many of those workers presumably are tipped, their actual gross pay may be above $10.10 an hour. (Federal law, as well as wage laws in many states, allow tipped employees to be paid less as long as “tip credits” bring their pay up to at least the applicable minimum.)”

Alternative history can make for great suspense fiction. Imagine, for instance, what would have happened had the Nazis successfully invaded England in 1940? But if contemplating “what might have been” in fiction is fascinating, analysing “what might come to pass” in real life can be paralyzing – and dangerous. Just ask any of the cities that have passed their own version of minimum wage hikes.

As other cities and companies consider similar moves the big question is whether these new rules hurt or help the local economy – and the very people the legislators set out to assist. So far the answer depends on who you ask.

Some businesses argue that it will necessarily cost jobs: that small businesses, in particular, will be unable to afford to pay employees more and either will be forced to lay off staff or will have to close their doors entirely, and that consumers will suffer, as prices rise. There is plenty of anecdotal evidence that this occurs, as small business owners tell their stories.

Not all businesses will find this transition easy or painless. But if a small business’s profit margin is so razor-thin that it can’t pay its employees enough to allow them to live above the poverty line if they are trying to support even a single child, then perhaps that company might want to reconsider its business model?