Macroeconomics: Minimum Wage Essay
Minimum wage refers to the lowest remuneration that an employee gets legally in hourly, monthly or daily bases. It may also be defined as the lowest wage that that employees may use to sell their labor. In order to have a motivated workforce in the private as well as in public sector, governments intervene and set up minimum wage that employers should adopt. It is worth to note that even though minimum wage regulations are followed in many jurisdictions, there exists difference of opinions that touches on the benefits in addition to the draw backs of the minimum wage (Sowell 21). According to the supporters of the policy, minimum wage improves standard of living of workers, reduces inequality and poverty, improves morale and makes businesses to be efficient. On the other hand, opponents argue that minimum wage increases poverty and unemployment as well as causing damage to businesses. This paper seeks to develop five economic implications that minimum wage has on the environment, global operations, nationally or locally.
Small business employment
According to the supply side economists, the major opponents, minimum wage has negative implications at small businesses in local places as well as in urban areas. Their argument is that minimum wage directly affects the operations of small businesses since large amount of their earnings goes directly to pay their operating expenses. This entails purchasing of equipments, lease and mortgage, credit lines, employees wages and inventory among other expenses. For the small businesses the single major costs are the workers’ wages and benefits. Additionally, this cost cannot be controlled. By initiating a higher minimum, the business must hire fewer employees or reduce the number of workers as a way of complying with the minimum wage law. This results to increased rate of unemployment. Based on the positive impact of small businesses in the national economy for example in absorbing the unemployed individuals, minimum wage may thus affect the development of a country through reduction real GDP.
According to research that was done by Heritage Foundation in 2003, increasing minimum wage would not reduce poverty level. This is based on the fact that there are few people who are employed full time and earn minimum wage. For example, the foundation noted that 75% of the employees who earn minimum wage are part time workers (The Economic Journal). They do not significantly rely on their income to improve their living standards resulting to increased consumer spending but little impact on poverty level.
Employment levels are directly and inversely related to minimum wage. Notably, the two have disproportionate impact on the young and unskilled workers. In case there is a rise on the minimum wage, young employees who are also unskilled become a major part of the unemployment pool. Based on the fact that the workers have little experience and are unskilled, small business opt to hire the skilled and experienced individuals. Similarly, this has an impact on the level of unemployment since the experienced employees must accept low paying positions to avoid becoming underemployed for example falling in the U-6 rates as indicated by United States levels of unemployment.
Just like in the agricultural sector where products are produce and beef among others, labor is also a commodity since it depends on current and future demands. One notable point in economy is that when a product is highly demanded, the price increases and when it is not highly demanded the price reduces. Similarly, labor undergoes the same treatment of market forces. For example, during the time of economic improvement, labor becomes expensive thus making the small businesses to increase the wages for experienced and skilled workers (Ehrenberg 13). During economic downturn, the price of labor increases.
During the control of the commodity prices, most governments embark on analyzing their minimum wages. Similarly, during economic upturns, some workers are involved in go slow and strikes with an aim of forcing their employers to increases their wages. However, it is worth to note that minimum wage has significant impact on the national prices in addition to the unemployment rate and labor markets. Large companies and small businesses, which are not in a position or are not willing to absorb the cost of high minimum wage, embark on passing the cost to their consumers (Global Economy Journal 17). Additionally, services and products that are provided by businesses clients are adjusted upwards in order to offset the costs arising from higher minimum wages. As a result, there is devaluation of both the consumers spending and dollar. As the result of being faced with increased prices, consumers reevaluate their spending and select the items that they want to buy and avoid purchasing other items. As the result of continuous price increment, the inflation rate increased. The Philips curve below indicates the relationship that exists between unemployment and inflation.
The ripple effects of minimum wage
Even though not many workers report the minimum wage being below or equal to minimum wage, most of the workers in US and many other countries, earn wages close to the minimum wage. For example this occurs in the states that operate in line with the federal minimum wage as well as the states that have come up with their own minimum wages. An increase in the minimum wage for example as the result of government intervention generates a ripple effect for the employees earning wages that is close to that threshold Campbell et al, 36). The ripple effect takes place when an increase of the minimum wage results to the increment of the earning received by the workers earning above the minimum wage. In US, states have the independence of setting their own minimum wage above that of the federal government. For example, 18 states including the District of Columbia have a minimum wage that that is higher that the federal wage floor in 1012. The minimum wages for these states range from $7.40 to $9.04. One point to note is that in these states, approximately 3.9 million workers receive their state’s minimum wage and more than 12 million employees earn the authorized level but not more than 150 percent of the minimum level.
One of the good examples of the implications of minimum wage on the economy was triggered in 2013 by President Obama. As a president two touched on income inequality as the theme of the second term, he dealt with it through proposing to the congress to increase the minimum wage by 12%. As the result this would benefit more than 15 million low wage workers. It was noted that the move by the president was aimed at increasing the nominal wage to $9 per hour by the end of 2015. Additionally, policy makers and liberal groups viewed the proposal as a way of reducing poverty as well as to raise the spending power of the poorest employees.
Economic consequences are always hard to predict. Historically, economists looked at minimum wage as a way of distorting prices an aspect that reduced workers’ demand affected by the minimum wages. However, through various bodies and policy makers, this assumption was disapproved. For example, when Britain introduced the minimum wage in 1999, it was noted that it had no impact on the jobs. A research by Arindrajit Dube, William Lester and Michael Reich that included making comparisons of the minimum wages in various states, there was no negative implication on employment in areas whose minimum wage was increased. It is necessary however, for countries and policy makers to make proper analyses of the economy before enacting or increasing the minimum wages.
Campbell, M., Stanley, B., Sean, F. Macroeconomics. New York: McGraw-Hill Higher Education, 2014. Print.
Ehrenberg, G. Labor Markets and Integrating National Economies, Brookings Institution Press, 1994. Print.
Global Economy Journal. The Official Publication of the International Trade and Finance Association.2015.
Sowell, T. Minimum Wage Laws. Basic Economics: A Citizen's Guide to the Economy. New York: Basic Books, 2004. Print.
The Economic Journal. February 2015 Volume 125, Issue 582