Introduction
The federal minimum wage in the United States currently stands at 7.25 USD per hour. This standard has been enshrined in the Fair Labor Standards Act. A minimum wage is crucial for low-income families to make ends meet. Statistics show that an hourly wage of 7.25 USD for a family of three would still leave them significantly lower in the poverty line. In addition, most low-income earners are vulnerable populations who take up low-income employment due to the absence of alternatives. A revision of the hourly wage to 15 USD would be significant in enabling low-income earners to make ends meet (Herr & Kazandziska, 2011). The Consumer Price Index would guide an upward revision for All Urban Consumers in urban cities, a calculation that considers the prevailing inflation rates and reflects the findings in the review of the minimum wage. This consumer index factors in housing, food, and healthcare costs. There is an increase in the public discourse to have the minimum wage in the United States increased to 15 USD. States are mandated to set minimum wage in law (Herr & Kazandziska, 2011). States and cities such as Florida, Seattle, New York, and Chicago have been proactive and initiated legislation to increase the minimum wage to 15 USD. The minimum amount of tips increased from 2.13 USD to 5.90 USD. Thus the discourse on the increase in the minimum wage is set to gain traction, despite the slow pace of other states and cities in adopting an increase in minimum wage legislation (Doyle, 2017). In addition, the 7.25 USD minimum wage was last reviewed in 2016, hence the urgency of incrementing the minimum wage to 15 USD for low-income earners in the United States.
Keynesian economics and the minimum wage discourse
Arguments for the increase in the minimum wage are pegged on the notion of Keynesian economics on the aspect of economic demand and consumption. The Keynesian model of macroeconomics provides an outline that argues in favor of the increase in the minimum wage. According to Keynesian economics, spending is a crucial driver for the growth of economies worldwide, including in the United States. Therefore, an increase in spending by the citizens of a country directly results in the increased economic growth of the country, as mentioned above. The proponent of Keynesian economics, John Maynard Keynes, posited that the key to economic growth lies in the presence of demand and adequate spending to fulfill the demand as mentioned earlier (Jahan, Mahmud & Papageorgiou, 2014). Keynes argues that a country’s economic output is determined by the level of demand, the level of investments, the level of government interventions and purchases, and net exports. These aspects are crucial to economic growth and are influenced by the spending power of individual citizens in a particular economy. The Keynesian economic model references the economic depression of 1928 as an example of how the economy can be affected by the diminished financial positions of individual citizens. Consumer confidence is significantly reduced when citizens have reduced spending power during a recession. Spending reduction diminishes the demand for products and services (Jahan, Mahmud & Papageorgiou, 2014). The prominence of the Keynesian economics model during the Great Depression would highlight the roles that governments in post-world war I could play in stabilizing the economic slump experienced during this period.
History of the Keynesian Economics theory
The Keynesian economic model directly contrasted with the classical economics that prevailed during the 18th and 19th centuries. The classical school of economics proposes the self-regulation of markets in a true capitalist fashion. Self-regulation of the economy applies to concepts of the free market, where the economic aspects of value, supply, demand, pricing, and distribution would be even out on the free market without any form of control from governments or monarchies (Keen, 2013). The concept of free trade would enable the emergence of competition within the economy, as free trade would eliminate components of class and meritocracy within the economies (Keen, 2013). The proponents of classical economics, such as Adam Smith, advocated for increased competition within the free markets, enabling market forces to stabilize and ensure free trade and economic growth. However, the classical economy would become irrelevant in the face of economic difficulties and would face significant consternation, which would result in the emergence of Keynesian economics. Keynesian economics posited that the classical school of thought would lead to underconsumption, an aspect of economic recession (Keen, 2013). Underconsumption would also be accompanied by underspending due to the reduction of spending power. According to Keynesian economics, increased government control over the economy would avoid the impact of economic downturns in a manner that free trade, free markets, and competition within the classical school of thought cannot. Laisse-Faire approaches to the economy would thus not be able to control the economic slump as unregulated markets would only worsen the situation for individuals (Keen, 2013). A classical school of thought application on the subject of the minimum wage would involve employers paying employees what they deem fair wages without government intervention. Therefore, there would be increased competition in labor markets. However, in economic difficulties, the minimum wage would be dictated by the prevailing market conditions within free trade. This would mean that businesses would dictate the terms of employment, including minimum wage. Without government intervention, the minimum wage could be as low as employers want due to the absence of regulation.
An explanation of the economic crisis of 2008 can also be explained using Keynesian economics principles. The crash of housing markets in the economic recession occasioned by the global financial crisis of 2008 was due to consumers having diminished financial and economic positions to take advantage of housing markets. Keynesian economics attributes the increase in spending and fulfillment of demand and output to government intervention (Shaikh, 2011). When the government, for instance, increases spending on economic outputs, the economic impact would include stability in the economy and employment markets. In line with Keynesian principles, the increase in the minimum wage in low-income earners brackets would be crucial to growing the economy, as spending power for critical populations who form the bulk of the US population would be increased. An increase in consumer confidence would also increase demand for goods and services, a factor that would significantly spur the economic output of the United States (Lavoie, 2022). An increase in minimum, coupled with the reduction of interest rates for low-income earners, would also be significant in enabling increased investments from the aforementioned key population, further realizing benefits for the US economy. Therefore, in line with Keynesian economics, increasing the minimum wage as a fiscal policy would directly result in economic growth.
The 2008 Global Financial Crisis and the Keynesian Economic Theory
As mentioned above, the global financial crisis of 2008 represents an instance where Keynesian economics would have applied to ensure the navigation of the world economy through the harsh economic times. The significant economic decline that brought about the financial crisis in 2008 meant that austerity measures were necessary to remedy the financial crisis. The global financial crisis of 2008 is seen as the most significant global economic crisis since the great depression of the early 20th century after the first world war (Keen, 2013). the global financial crisis in the United States was occasioned by the depreciating value of the housing markets, which resulted in chain reactions that spread across the globe due to the presence of the global financial system. The global financial crisis would come about due to the increased risks of the macro business environments. The excesses in risk-taking led to individuals and businesses taking additional risks to exploit the macro environment expectations, especially in the housing sector (Shaikh, 2011). The loan markets also lend arbitrarily, and they were not compliant with borrowing regulations in making correct risk assessments on the abilities of individuals and businesses to repay hefty loans taken. Banks and investors would also take loans to finance borrowing demands from clients, and the absence, as mentioned earlier, of risk assessments for borrowers meant that banks and investors were increasingly vulnerable to fraud and opaque nature, especially in the mortgage-backed securities for loans (Shaikh, 2011).
The financial crisis saw the US housing markets fall as borrowers missed loan repayment. The stress on the financial markets was also significant as the crisis spread to global financial markets. The Keynesian economic model was thus applied, enabling the intervention of world governments, especially in the United States, to remedy the financial crisis. The federal government would invest significantly in corporate bailouts, investing millions of dollars in relieving banks, investors, and insurers of their debts. The president of the United States at the time, president Barrack Obama authorized the American Recovery and Reinvestment Act in 2009 (Jacobs, Perry & MacGillvary, 2021). The act would authorize various government expenditures earmarked as an economic stimulus for the American people to arrest further economic slump. The stimulus package entailed tax incentives for low-income earners, including tax reliefs for families to 800 USD. There was also increased infrastructure project funding which would see the government invest 120 million USD (Jacobs, Perry & MacGillvary, 2021). Other investments would include funding for health care and education. These interventions by the government would increase economic relief for the US citizens, stabilizing the economy and enabling US citizens to manage through the economic slump.
Summary
In summary, the Keynesian economic model expounds on the contributions that governments can make in addressing the minimum wage issue. Increasing the minimum wage of low-income earners would be crucial to increasing the spending power of low-income earners and increasing consumer confidence within this particular population segment. This means that increasing the minimum wage for low-income earners to 15 USD would enable the United States economy to increase its economic output, in the knowledge that its population can match the supply with demand for goods and services. Increasing the minimum wage would require federal legislation to effect. The Fair Labor Standards Act amendment would be crucial to increasing the US minimum wage. The application of the Keynesian economics model shows how the government’s increased involvement in economic matters would enable faster resolution, as opposed to the classical school of thought and the concept of free trade. The great depression of 1929 and the global financial crisis of 2008 highlight instances of the emergence of the Keynesian economic model and its application, respectively. The 2008 global financial crisis was solved through the US government’s investments in tax reliefs and corporate bailouts for struggling low-income families and institutions, respectively.
Additional knowledge
In addressing the issue of minimum wage, more states and cities are increasingly taking additional steps to amend the minimum wage issue, enabling low-income earners in these cities and states to earn the desired 15 USD as minimum wage, as well as the increase in the minimum tips for workers increasing to 5.90 USD. The legislation is part of the state governments’ increased roles in the remuneration of low-income earners (Wilson, 2019). These states and cities, including Florida, New York, and Seattle, have enacted laws that have increased the minimum wage to 15 USD per hour. In addition, the Raise the Wage Act seeks to increase the minimum wage of low-income earners to 15 USD per hour by 2025, which would benefit close to 32 million US citizens (Wilson, 2019). Increasing the minimum wage would be a significant step towards bridging racial income disparities, achieving economic stimulation, and reducing public assistance spending by the US government.
Recommendation
I recommend increasing the minimum wage for low-income earners in the US from 7.25 USD per hour to 15 USD per hour. This increase would benefit low-income earners to experience better economic aspects (Doyle, 2017). The minimum wage increase would enable low-income earners to afford food, housing, and affordable health care, while generally increasing US citizens’ consumer confidence and purchasing power. Overall, the increase in the minimum wage would result in the economy of the United States.
References
Doyle, A. (2017). Pros and cons of raising the minimum wage. The Balance», December14.
Herr, H., & Kazandziska, M. (2011). Principles of Minimum Wage Policy-Economics, Institutions and Recommendations (No. 11). Global Labour University Working Paper.
Jacobs, K., Perry, I. E., & MacGillvary, J. (2021). The public cost of a low federal minimum wage. Center for Labor Research and Education-University of California Berkeley. Recuperado de: https://laborcenter. Berkeley. edu/wp-content/uploads/2021/01/The-Public-Cost-of-a-Low-Federal-Minimum-Wage. pdf.
Jahan, S., Mahmud, A. S., & Papageorgiou, C. (2014). What is Keynesian economics. International Monetary Fund, 51(3), 53-54.
Keen, S. (2013). Predicting the ‘Global Financial Crisis: Post‐Keynesian Macroeconomics. Economic Record, 89(285), 228–254.
Lavoie, M. (2022). Post-Keynesian Economics. Books.
Shaikh, A. (2011). The first great depression of the 21st century. Socialist Register, p. 47.
Wilson, V. (2019). The Raise the Wage Act of 2019 would give black workers a much-needed boost in pay.
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