3 Pros and Cons of Raising the Federal Minimum Wage: Where Do You Stand?

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Source: Flickr user Joe Lustri.

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Few subjects are as touchy as whether or not to raise the federal minimum wage, which currently sits at $7.25 per hour. The last time the federal government raised the minimum wage was all the way back in 2009, and although inflation has been subdued, it has been averaging about 2% per year since then.

To raise or not to raise; that is the question
The minimum-wage debate gained a lot of attention last year when the city of Seattle voted to enact a $15-per-hour minimum wage, making it the highest minimum wage (for a city) within the country. The issue was again reignited last week when the largest retailer in the world, Wal-Mart , announced a radical plan to boost hourly pay for about 500,000 full- and part-time associates to $9 by April 2015 and to $10 by Feb. 2016 from the current federal minimum wage.

Wal-Mart's proposal isn't much different from legislators' last serious proposal to raise the federal minimum wage, which would have increased the minimum to $10.10 over the course of three years. That proposal didn't pass muster in Congress, but the issue is far from dead!

Raising the federal minimum wage isn't a simple, cut-and-dried issue. There are forces at work on both sides. Although a minimum-wage increase is coming at some point, the real question is exactly how great that increase should be. The latest government proposal suggested a 39% increase phased in over a three-year period. To some, that could be a steep increase. To others, it's not enough.


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With that in mind, let's have a closer look at three benefits that could be realized by raising the federal minimum wage, as well as three disadvantages of boosting the minimum wage.

Three benefits of raising the minimum wage

1. Improved living standards: The first benefit is that millions of Americans would see a pay raise that could go toward meeting their basic needs and living expenses. A 2013 report from the Congressional Budget Office estimated that 16.5 million low-wage workers would benefit from a $10.10-per-hour wage, including 900,000 workers who would climb above the poverty threshold. A more recent analysis by CNN was even more aggressive, implying that 5 million Americans would be lifted out of poverty at $10.10 per hour. More workers being able to pay for their basic expenses is a good thing, as it may lead to less reliance on government- and state-sponsored financial-aid programs.

2. Higher worker morale: Secondly, getting paid more could potentially boost worker morale. One of the toughest challenges businesses face is encouraging minimum-wage workers to "give their all." As someone who worked for near minimum wage as a teenager, I can fully appreciate that these workers' motivation may not always be sky-high. Additionally, retaining workers over the long haul and/or maintaining a cohesive team of employees can be tough, because the pay doesn't encourage talented individuals to stick around. However, a minimum-wage boost could improve worker morale, which couldin turn improve productivity and help keep turnover rates down.

3. Consumer spending uptick: Lastly, extra pay in the pockets of some 16.5 million workers could trickle down to retailers and provide a boost to the economy. This isn't to say low-wage workers wouldn't save some of their extra pay, but given the poor savings rate of workers in the U.S., let's just say I wouldn't be surprised to see consumption rise, with large warehouse retailers like Wal-Mart benefiting in a big way.

But this tells just one side of the story. Now let's look at some of the disadvantages associated with boosting the federal minimum wage.


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Three disadvantages of raising the minimum wage

1. Business could raise their prices: What often gets lost in the discussion about raising the minimum wage is that low-wage workers probably wouldn't be alone in having their wages hiked. Management and longtime employees of businesses who have worked their way up through pay raises would also likely have their pay increased to match their title and tenure. These are extra costs most people fail to account for, and businesses could choose to deal with it in one simple way: by boosting prices. If the price of goods and services goes up across the board to make up for higher employee wages, it may not only negate the wage hike for low-income workers, but also unintentionally hurt middle-class Americans' pocketbooks.

2. Jobs and benefits could be cut: Another possible outcome is that businesses, instead of raising prices to counter the higher cost of wages, simply cut employees or reduce benefits. The aforementioned CBO report from 2013 estimated that half a million jobs would be lost if the federal minimum wage were raised to $10.10 per hour. Another casualty here could be worker benefits, such as paid vacation, reimbursed parking, or even gym memberships. As businesses look to cut costs after the minimum-wage raise, worker benefits could be the first to go.

3. Reduced desire for career advancement:Finally, whereas a pay raise may boost workers' morale, it could damage their drive for self-betterment, further impeding the opportunity of low-wage workers to improve their socioeconomic outlook. Workers suddenly receiving $10 per hour might be less inclined to go to college or seek out a specialized job when they've seen their pay increase by 39% over the span of a few years. This sense of complacency is bad not only for the workers themselves, but also for business owners who benefit from growing side by side with their employees.


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Where I stand
Personally, I don't believe $7.25 per hour is sustainable for the more than 3 million workers taking home the federal minimum wage, and I would contest that raising the wage is the right thing to do to boost the economy, lift worker morale and productivity, and improve the self-sufficiency of potentially millions of workers.

But I also feel the minimum wage should probably be raised to somewhere between the current $7.25 and the previously proposed $10.10. Though $10.10 might make low-income workers' eyes light up, it would also come with a lot of unintended consequences that could negatively impact businesses, investment in businesses, and middle-class American families.

Of course, that's just my opinion.

Where do you stand on the federal minimum-wage debate? Sound off in the comments section below.

The article 3 Pros and Cons of Raising the Federal Minimum Wage: Where Do You Stand? originally appeared on Fool.com.

Sean Williamshas no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen nameTMFUltraLong, track every pick he makes under the screen nameTrackUltraLong, 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.