The Ripple Effect
In my last two blog posts I cited multiple studies and authors who believe that minimum wage will only affect a small group of people. Policymakers, analysts, and authors, regularly state that only a small percentage of the workforce actually earns the federal or state minimum wage. These people usually argue that most workers earn slightly above minimum wage, so a raise to $15 an hour will not have a large negative effect on businesses, but will help the few who are earning minimum wage and struggling because of it. According to Melissa Kearney and Benjamin Harris, writers for The Hamilton Project, these studies all miss a key point known as “the ripple effect.”
It is likely that you have heard of the domino effect. You knock down one domino in a series, and it begins a chain reaction of completely identical events until all of the dominoes have fallen. A similar, but less known reaction is the ripple effect. The ripple effect is when one action causes multiple homogeneous events which grow in influence or severity the further they are from the source. In context to the minimum wage, this is what happens when all the workers in a company making $7.25 an hour, suddenly receive a raise to $15 an hour. What happens to the workers who were already making $15 an hour? It is only fair for them to receive a raise of the same 106% increase. Now, all the workers making $15 an hour are making $31 an hour. This process continues through the entire company until all workers being paid hourly have received a 106% increase in wages.
Ben Zipperer, a writer for the Washington Center for Equitable Growth brings up another issue with the ripple effect. The ripple effect is not only something which internally effects individual companies, it is a broad effect which ripples through entire industries. Zipperer explains it as follows:
Imagine all firms occupy rungs on a ladder, ranked by how well they pay their workers. After a minimum wage increase, the lowest paying firms raise their wage to the new minimum. This leads the next rungs of higher-paying firms to raise wages as well—to increase their ability to recruit and retain workers who would have better options elsewhere due to the minimum wage increase. The minimum wage then filters its way up the labor market, with ripple effects declining in influence further up the ladder.
This sort of activity can get very expensive, very quickly for both small and large businesses, and can cause product and service prices to increase throughout different industries to compensate for the payroll increases. As discussed in previous blog posts, studies have shown that increasing the minimum wage will increase the competition for jobs as businesses lay off workers and designate more work to less employees in attempts to save money. When the ripple effect is taken into account, it is not only minimum wage jobs which see increased competition and less fillable job positions, it is the entire workforce.
Kearney, Melissa, and Benjamin Harris. “The “Ripple Effect” of a Minimum Wage Increase on American Workers.” The Hamilton Project. N.p., 10 Jan. 2014. Web. 29 June 2016. http://www.hamiltonproject.org/papers/the_ripple_effect_of_the_minimum_wage_on_american_workers
Zipperer, Ben. “How Raising the Minimum Wage Ripples through the Workforce – Equitable Growth.” Equitable Growth. N.p., 28 Apr. 2015. Web. 29 June 2016. http://equitablegrowth.org/research-analysis/raising-minimum-wage-ripples-workforce