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Economic Ripple Effects

Shelton Weeks

What should we expect with a $15 per hour minimum wage? Clearly, the idea of increasing the minimum wage has widespread support—in Florida, we saw strong evidence of this support in the passage of Amendment 2 in November 2020. An array of politicians, including President Biden, also support an increase in the minimum wage on the national level.

As we prepare for this change, there is value in giving some thought to the impact it will have on the economy. Let’s look past the inflationary impact of increasing the minimum wage and focus instead on two largely ignored, but highly probable, labor market outcomes.

Increasing the labor market participation rate is one way to grow an economy. During the record expansion of the U.S. economy prior to the pandemic-induced recession, the labor market participation rate essentially stalled out around 63%. The market for child care services provides a lens through which we can see how this key statistic may take a hit as the minimum wage increases: Child care is a labor-intensive business, and firms in this space will be among the first service providers to be significantly affected by the change in labor cost.

These business owners will likely have to raise their rates in order to remain in business. While some of their customers will be able to absorb this cost increase, others will not. In fact, some of their former customers may be forced to withdraw from the labor market in order to provide child care. This could be particularly troubling for businesses that struggle to attract and retain employees. Luckily, the lessons learned during the pandemic may provide a pathway for firms to follow, such as employing technology to facilitate flexible scheduling or work-from-home alternatives, allowing individuals to continue participating in the labor market.

Many economists anticipate that raising the minimum wage will damage the employment prospects of individuals at the lower end of the skill spectrum. However, the reduced ability of low-skilled workers to secure employment only considers the initial impact of this change. As a result of there being fewer opportunities for entry to the job market by low-skilled workers, there will be fewer of these workers developing the skills needed to advance in their eld. As time passes, we will start to see the second-stage impact in the labor market as employers are forced to compete for a reduced pool of moderately skilled labor.

Looking beyond the wage impact of this situation, the most worrisome aspect of this situation is a widening of the skills gap. Prior to the pandemic, business owners frequently cited lack of qualified applicants as one of their primary challenges and the situation outlined above promises to make this a prominent concern as the economy moves toward recovery. On the other hand, this challenging situation presents an opportunity for educational institutions such as FGCU. Specifically, the lack of opportunities for new entrants in the labor market to develop their skills on the job will increase the value of experiential learning opportunities that provide students with skills that add value immediately in the workplace.

The potential negative impact on the labor market participation rate and widening of the skills gap will compound the challenge of the wage increase for many employers. Thankfully, the markets that make up our economy are filled with creative entrepreneurial individuals who will not only devise responses to allow their firms to adapt, but in some cases and new opportunities in their pathways forward.

Shelton Weeks is the chair of the Department of Economics and Finance in the Lutgert College of Business at Florida Gulf Coast University.

Photo Credit: Getty; Florida Gulf Coast University

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