Economy / Labor Force

What’s the Impact of an Extra Dollar?

Recently the solution to decrease the wealth gap is to increase the living or minimum wage for workers. The Los Angelas City Council recently approved an increased minimum wage for hotel workers at establishments with at least 125 rooms to $15.37. New York Mayor de Blasio plans to sign an executive order to increase the minimum wage from $11.90 to $13.13. With 23 states already over the federal $7.25, and more and more states act upon an increased wage, it calls to question if this is the best answer for economic development.

The policy of increasing living wages claims to grant workers fiscal responsibility, therefore allowing the state and federal government to bow out. Studies suggest, however, that an increase in the minimum wage actually increases unemployment and potentially hinders economic development. An alternative to increasing the minimum wage policy is to decrease the length in time that states offer unemployment insurance. This change in focus eases taxes on businesses, allowing businesses to hire more individuals at a lower cost. Additionally, it will motivate unemployed workers to search for work since the state will assist for a shorter time frame.

Out of the 50 states, only eight states offer unemployment benefits lasting less than 26 weeks, all of which saw a decrease in unemployment rates from August 2013-August 2014. These states have a range in minimum wage laws, with no state requiring higher than an $8.15 wage. Ultimately these states, Arkansas, Florida, Georgia, Kansas, Michigan, Missouri, North Carolina and South Carolina, have seen an increase in employment over the past year.

Florida, which offers the shortest length of unemployment insurance, up to 16 weeks dependant on employment length, is the second leading state in job growth, providing 22,700 new jobs in 2014, creating greater economic development. While the minimum wage increased to $7.93 in 2014 to account for inflation, the state saw a 0.7% increase in jobs according to the U.S. Department of Labor. This drop in unemployment shows a correlation between a short benefit period and new employment.

Of the eight states with lower unemployment incentives, decreasing unemployment rates coincide with the length of time which benefits are received. Increasing the minimum wage is not the way to decrease unemployment and spur economic development, rather minimizing incentives to remain unemployed by granting lower sums of money as well as shorter payout terms can lead to a growth in employment and development. Increasing wages to create a safety net is not enough to close the gap between the rich and the poor since it stimulates more unemployment and the cycle of state dependency continues.