The effects of raising the minimum wage Essay

Minimum wage is lowest wage legally permitted in an industry or in a government or other organization. Minimum wage is the minimum hourly, daily or monthly wages that employees or workers must be paid by the company. Each company sets its own minimum wage taken into considerations country’s laws and regulations. Almost all the countries in the world have similar kind of minimum wage laws and legislation.

Goal of raising the minimum wages

The goal in establishing minimum wages has been to assure wage earners a standard of living above the lowest permitted by health and decency. Raising the minimum wage s hikes as a useful tool to help reduce poverty as well as provide a “living wage” for the working poor population and sometimes act as a yardstick for policy makers to use minimum wage as a means of lessening the income inequality that has occurred over the last 30 years. (Padhy 11)

The minimum has been set by labor unions through collective bargaining, by arbitration, by board action, and, finally, by legislation. Introduced (1894) in New Zealand through compulsory arbitration, it has become part of the social legislation of almost all countries.

The first national minimum wage law was enacted by the government of New Zealand in 1896, followed by Australia in 1899 and United Kingdom in 1902.

In the United States, statutory minimum wages were first introduced nationally in 1938[1] and in the United Kingdom in 1999[2]. In the European Union, 18 out of 25 member states currently have national minimum wages.

It is essential for the policy makers to consider the benefits and problems associated with minimum wages, and determine whether they are really the best method to assist the poor. Before we evaluate the impact of the minimum wage, it is important to identify those who are affected by the minimum wage in the country.

Opposition on raising the minimum wage:

Many economists contend that raising the minimum wage brings with it unintended consequences that run counter to lawmakers’ aim of helping the working population. Like anything else, when the price of labor rises, businesses buy less of it. Minimum wage increases unemployment among low wageworkers, thus harming rather than helping the poorest workers. The minimum wage increases compress the wages distribution. Firms respond to these higher labor costs by reducing employment, reducing profits, or raising prices.

[1] European Employment and Industrial Relations Glossaries. European Foundation for the Improvement of Living and Working Conditions

[2] History of the National Minimum Wage. Employment Matters. United Kingdom Department of Trade and Industry

Raising the minimum wages increases the cost of government social programs due to assistance programs aiding the laid-off workers. Some also argue that higher minimum wages reduce teenage education levels and decrease workers’ long-term earnings. They contradict the benefits of raising the minimum wages and argue that the minimum wage does not reduce poverty and also slows economic growth of the country.

Minimum wage increases lead to widespread unemployment, and such an intuitive argument, that society would have to be a pretty bizarre place not to abandon the wrongheaded policy altogether. For those low-wage earners who are members of poor families, will experience severe effects that an increase in the minimum wage will have. Increase in minimum wages will reduces demand for workers through a reduction in the number of jobs. Also it will affect the profit margins of business owners employing minimum wage workers. By raising unemployment and eliminating entry-level jobs, minimum wage hikes also eliminate opportunities for workers to gain valuable experience and skills that prepare them for future jobs. These unintended consequences severely hamper low-income workers’ future job and earning prospects and decreases opportunities for low-skilled workers to gain the training and responsibility they need to move up the wage ladder. (Padhy 31)

Minimum Wages Reduce School Enrollment

Most people affected by the minimum wage are actually young workers. When the minimum wage rises, it increases the incomes of teenagers with minimum-wage jobs, making entering the workforce more attractive. It can cause some students to spend less time in school and more time working. Raising the minimum wage actually motivates teenagers to make choices that may push them into poverty later in life. And if the employers prefer to hire teenagers to low-skilled adults, the number of teenagers enrolled in school would drop. (Padhy 22)

Minimum wage legislation may be interpreted as making it either unlawful for employers to pay workers less than the minimum wage, or unlawful for workers to provide labor or services for less than the minimum. Minimum wage increases as only a short-term benefit to the poor. Prices will quickly adjust for this increase as companies raise prices to make up for the increased wages they must pay. They need to keep profits the same or raise them…so a rise in employee wages will equate to a rise in prices.

Many economists suggest that there are a lot of valid reasons to be against raising the minimum wage. Probably the most compelling is that the benefit does not equal the cost. Economists proposed that there exist two main fears with raising the minimum wage; they are:

1. Inflation

2. Increase in unemployment.

No reasonable economic analysis can possibly come to the conclusion that an increase in the cost of one of the many units of production will not increase the total cost of goods. The position that a raise in the minimum wage would not create inflation would need to take the same position regarding an increase in the price of oil, steel or whatever else. Human capital is just another one of these units to take into account.

Raising the minimum wage is not something that affects just those with low paying jobs. It immediately forces the business to raise prices proportionately on all products. Meaning consumers pay more…meaning strain on their budgets meaning forcing their employer to raise wages for all. It directly does increase inflation. The government than has to print more money for circulation, dollar doesn't buy what a dollar could before! Granted for maybe one week those with minimum paying jobs have more purchasing power but than they are right back in the same boat. Free-market means you are paid for your skills. Years ago remember anybody with a computer degree or skills were riding a golden train. Now the market has righted itself and demand for those same skills plus pay level have dropped sharply. If some one is willing to work for $5 an hour than they are worth $5 an hour. But if no one will do the job and you have to raise the wage to hire someone than that is free market. People seem to want to go around this time tested system and just get money quickly.

Some 90% of economists believe the minimum wage raises unemployment among low-skill workers. There is a wide consensus that it leads to inflation as well. That's not to say raising the minimum wage would destroy the economy. There are also the political and ethical reasons against the minimum wage. As other people have answered, it's not the job of the Federal government to set wages. In my opinion, it's not the job of the states, either. No government should be involved in the private, consensual decisions of adults. That includes things in the boardroom along with things in the bedroom. (Montag 55)

At an absolute minimum, a living wage is the amount a person would need to earn to stay above the federal poverty level.

There is a much broader body of evidence examining the relationship between increases to the minimum wage and unemployment. The vast majority of economic research concludes that there is little or no loss of jobs associated with small wage increases, where small is defined as increases that adjust the minimum wage for the effects of inflation

Supporters of the minimum wage:

Supporters of living wage laws say that the current minimum wage simply does not keep up with the cost of living. Allowing employers to pay less than a living wage is just cost-shifting to the public at large, forcing the government and private charities to fill in the gap between low pay and survival. Many economists supports that the minimum wage is a matter of social justice which helps reduce exploitation and ensures that workers can afford basic necessities of living.

Raising the minimum wages of labors increases the average living standard of their families, forces employers to recognize the inherent worth of human labor and reduces labor exploitation. There exists a relationship between wages and effort. Increasing the minimum wage will increase effort on the work performance of employees. Higher wages cause higher effort and encourage workers at the lower end of the wage distribution who are most likely to be discouraged and shirk on the job. (Padhy 40)

There are various theories behind the concept of efficiency wages. The four reasons usually given for efficiency wages are first, in poorer countries, stimulates consumption, by putting more money in the hands of low-income people, higher wages can increase nutrition and health leading to an increase in productivity and output. Second, higher wages can reduce turnover-decreasing hiring and training costs reducing costs per worker and stimulates economic growth by discouraging labor-intensive industries, thereby encouraging more investment in capital and training. Third, the average quality of workers can depend upon the average wage paid since lowering wages will cause the best workers to leave. Fourth, higher wages can bring forth higher effort. In these models it is optimal to pay a wage above the wage that equates the supply and demand for labor. Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees.

Over 650 economists, including 5 Nobel prize winners and 6 past presidents of the American Economic Association, believe that increasing federal and state minimum wages, with annual cost-of-living adjustments for inflation, (Padhy 19)

“can significantly improve the lives of low-income workers and their families, without the adverse effects that critics have claimed.”

Supporters deny claims of causal links between the minimum wage and adverse impacts upon employment, and suggest that in any event, greater social benefit derives from the minimum wage. Raising the minimum wages of employees increases the economic efficiency of the economy where labor markets exhibit a high degree of market power on the part of employers.

As Kash explains, (Montag 51)

“The minimum wage goes up in one place, but doesn't change right next door. Employment in restaurants goes up in both places – if anything, by more in the place where the minimum wage went up…Putting all of these different types of papers together, my conclusion is that the best evidence that labor economists can gather from data seems to indicate that we need not fear major employment losses if we were to increase the minimum wage. The effects may be slightly negative for teenagers, but overall the effect on jobs may be zero to even slightly positive.”

Debate over consequences of minimum wage laws

The subject of minimum wages and their effect on unemployment levels is a controversial issue. The majority favor increases in the minimum wage. They look at these increases as a way to help the poor. To understand the studies and their problems, it is important to understand the traditional argument that raising the minimum wage reduces employment among low-skilled workers. The reason is simple. The demand for labor–the number of man-hours (not workers) employers want to buy at different wage rates–is determined by the expected productivity of the given workers. So if wages rise by decree, rather than because workers can produce more per hour, employers will hire fewer hours of labor.

The magnitude of harm from the minimum wage may not seem so bad, since it does not ruin the economy. But the benefit is even smaller. As of 2005, only about 2% of workers earned the minimum wage. Most of these are young people or part-time workers, not people trying to support a family. And even most of these people will earn more than the minimum wage after a few weeks on the job. Very few people are hired at the minimum wage and stay there for very long.

Politicians exploit these feelings by raising the minimum wage to gain popularity. Supporters of the minimum wage argue that it provides a fair wage for the least skilled employees in the country. They also argue that increased pay can often lead to increased loyalty and productivity. However, these raises in the minimum wage often hurt the very people that need the help. Economists agree that increasing the minimum wage does almost nothing to help the working poor, and have noted that about one-third the people who benefit from a minimum wage increase are teenagers. Economists also recommended an increase in the earned income tax credit, rather than a minimum wage increase, to actually help people. Minimum wage increases, though, are politically expedient.

Classical microeconomic theory (Supply and Demand) says that by mandating a price floor above the equilibrium wage, minimum wage laws cause unemployment. This is because a greater number of workers are willing to work at the higher wage while a smaller numbers of jobs will be available at the higher wage. Companies can be more selective in who they employ thus the least skilled and inexperienced will typically get excluded. (Wikipedia)

However there is no evidence that boosting the minimum wage would benefit the incomes of low-paid workers it would destroy jobs and thus reduce employment for many workers especially minority youth. Although the effects of a minimum wage hike are difficult to determine, the vast majority of studies still show that increasing the minimum wage above the equilibrium wage level will result in an increase in unemployment. If the goal is to keep people employed, especially the poor, then this adverse effect of raising the minimum wage is unacceptable. It is difficult to understand how raising the minimum wage can help the poor. The number of people who become unemployed will offset any income gains received by those who remain employed.

There are many economists believe that the minimum wage has no negative impact on unemployment and can even increase employment. Increases in the minimum wage can reduce employee turnover and increase loyalty, leading to lower unemployment.

As rightly quoted

“It is a fact that many minimum wage increases are simply nonbinding. After long periods of little or no increase in the minimum wage, an increase may not raise the minimum wage above the equilibrium wage in the labor market. If one were to do a study under this situation, they would most likely conclude that an increase in the minimum wage has no negative impact on unemployment.” (Padhy 13)

If higher minimum wages can actually increase employment, as suggested by some, then output should increase. This increased output would then result in lower prices. There is absolutely no evidence to date showing that an increase in the minimum wage has led to a decrease in prices. In fact, many of the studies of the fast food industry show prices typically increase after a hike in the minimum wage. Some argue that minimum wage increases are simply passed on to consumers in the form of higher prices, and employment remains unaffected.

Economists disagree as to the measurable impact of minimum wages in the 'real world'. This disagreement usually takes the form of competing empirical tests of the elasticities of demand and supply in labor markets and the degree to which markets differ from the perfectly competitive efficient ideal. Those who oppose a higher minimum wage say it sets the price of low-skilled labor too high and so forces employers to hire fewer workers. While some will make higher wages, they argue, many others will be out of a job, pushing more into poverty. Anti-minimum-wagers believe the best way to benefit the entire economy is too let the free market set wages, not the government. By setting artificial minimums on the price of labor, small businesses that have limited cash to pay their employees will be forced to decide whether to cut employees or go out of business. They also worry that a higher minimum wage will force companies to move their jobs abroad where labor is cheaper.

A higher minimum wage destroys the jobs, which have a naturally lower wage, due to lower skill level needed and an overall lack of worth for the job. When the production costs rise, prices follow suit and work towards higher inflation. Wages should be left to the force of supply and demand of a market, as an employee with no skills does not offer much to a business, and as such should be paid less. This in itself acts as an incentive to take job training, to learn skills, and to better oneself in the job, which one is working. With improvements in skill comes pay increases, as the worker becomes worth more to the employee

Theoretical arguments

The center topics for arguments in favor of raising the minimum wage constitutes to restore its real spending power to levels of previous years, to increase the incentive to work, and, as a matter of fairness, to allow those who work to earn incomes above the poverty line. And the center topics for arguments for against raising the minimum are displacement effects resulting in lower levels of employment.

The debatable question that the overall impact of a minimum wage is positive, as the following facts make clear: (Padhy 29)

(1) The minimum wage were increased nationally to $7.25,then:

4.9 million workers would receive a raise, 80% of those affected are adults age 20 or over, and 7.3 million children would see their parent’s income rise.

(2) ·Families with affected workers rely on those workers for over half of their earnings.

(3)·46% of all families with affected workers relies solely on the earnings from those workers.

(4)·Some minimum wage workers remain in low-wage jobs for substantial periods.

(5) The best recent research on the economic impact of the minimum wage shows positive effects without job loss.

(6) Even the research that suggests a negative labor market effect shows only a minimal impact that is more than offset by the higher wage levels.

(7) The states that have adopted higher than minimum wages of low-wage workers’ incomes rise with no negative side effects.

Of course, the impacts won't be distributed evenly across industries … the negative wage-cost effects will be focused in low productivity jobs, and the positive income effects will be spread more widely, and so on average will go toward high productivity jobs. That is, while the net employment effect tends to be around zero, there is some swapping out of bad jobs for better ones.

Long-Term Effects of Minimum Wages

The fact that minimum wages reduce educational attainment suggests examining their long-term effects. In a recent study, Neumark and Olena Nizalova, of Michigan State University, examined the incomes of adults who had been teenagers when minimum wages rose in their states. [3].They found that minimum wage hikes reduced both the probability of holding a job and the incomes of workers exposed to them over a decade later.

[3]David Neumark and Olena Nizalova, “Minimum Wage Effects in the Longer

Run,” National Bureau of Economic Research Working Paper. June 2004

They also found that the minimum wage did not always have the effects predicted by classical theory. For instance, reductions in employment are often found to be quite small. Furthermore, even if raising the minimum wage harms employment, it might still reduce poverty by giving more to the employed poor than it takes from the unemployed. Raising the minimum wage has these negative long-term effects because it alters the choices that people make today in ways that have long-term consequences. It induces some students to drop out of school, reducing their long-term employability.

There is a growing view among economists that the minimum wage offers substantial benefits to low-wage workers without negative effect. Although there are

Sufficient research shows that the job loss reported in earlier analyses does not, in fact, occur when the minimum wage is increased. These arguments, both pro and con, are largely empirical in nature. Almost all economists have agreed on one issue: Raising the minimum wage leads to greater unemployment among workers with low skills. Both basic theory and many empirical studies support that conclusion. That is, debate of these arguments centers on the application of data and analytic techniques. The traditional analysis objects that a minimum wage is really a kind of a subsidy provided to some low-wage workers. Subsidies are expensive and distort the market. But the fact is that poor people are already the beneficiaries of welfare benefits even if they don't work. So having a minimum wage could be the lesser of two evils; it could mean that at least some poor people attain a decent standard of living through wages, not through welfare payments.

There is concern that raising the mini-mum wage will cause some current teenage workers to lose jobs or damp-en the chances of low-skilled persons to enter the workforce. Evidence of this is inconclusive. In some cases recent increases in minimum wage have resulted in measurable job loss, in other cases there have been job gains or negligible effects Policymakers who support raising the wage floor may accept findings that minimum wage increases do not adversely affect employment, but economists question them. Critics have charged that the studies use poor data or incorrect methodologies. Some economists also argue that no convincing theoretical model predicts that minimum wage increases do not reduce employment. Many of these economists believe that a competitive model that predicts that an increase in the wage floor should always reduce employment instead characterizes low-wage labor markets. This article describes and evaluates several alternative models that may explain the controversial recent findings and proposes avenues for future research that would help determine the validity of these models.

Economist Erica Schoenberger suggests that the real deterrent to urban investment is not high costs, but high levels of poverty:

“Poverty, quite plainly, generates insecurity and difficulty for the rich and the poor alike. It severely limits the local market, which makes a city uninteresting to many kinds of business. It produces ill-prepared workers whose lives are easily disrupted by small catastrophes. If the car breaks down, if the kid gets sick, it suddenly becomes impossible to be a reliable worker. Poverty also generates poor health among workers, making them less reliable still and raising the cost of employing them. It creates a lack of physical security for workers, employers, and property. It produces also a meager tax base and poor physical infrastructure and public services. The costs of doing business could be subsidized to near zero in such a place and investment might still not be forthcoming.”

So, rather than threatening the city’s economic prospects, a living wage policy, by helping to raise workers out of poverty, becomes a central tool for economic development and a positive contributor to a city’s investment climate (Schoenberger).

Employment is not the only area worthy of further research on the effects of minimum wage increases. The distributional consequences of minimum wage increases are at least as important as the employment effects, particularly if higher-skilled workers displace lower-skilled workers when the minimum wage rises.

Recent research has challenged the conventional wisdom among economists that increases in minimum wages lower employment among low-wage workers.

Previous research generally found small but significant negative effects of higher minimum wages on low-wage workers, particularly teenagers. Although some studies, such continue to find negative effects, and others raise the question of whether the minimum wage can be raised moderately without reducing employment. If these findings are correct, economists may need to reconsider their views of how labor markets work.

Minimum wage increases may also slow the rate of small business formation, a possibility that has not received much attention in the economics literature. The recent findings that minimum wage increases do not appear to affect employment

adversely should be taken as the starting point for a larger examination of the effects of the minimum wage level rather than an end to the debate.

The traditional economic argument views the labor market as perfectly competitive. In perfectly competitive markets, the market price settles to the marginal value of the product. Therefore, under the perfect competition assumption, absent a minimum wage, workers are paid their marginal value. As is the case with all (binding) price floors, minimum wage laws are predicted to result in more people being willing to offer their labor for hire, but fewer employers wishing to hire labor. The result is a surplus of labor, or, in this case, unemployment. Many analysts point out that no collusion between employers to keep wages low has ever been demonstrated, asserting that in most labor markets, demand meets supply, and it is only minimum wage laws and other market interference, which cause the imbalance. However, it is important to note that collusion is not a pre-requisite for market power; segmented markets, information costs, imperfect mobility and the 'personal' element of labor markets all represent movements away from the idealized perfectly competitive labor market. Newer, more rigorous studies show that raising the minimum wage most likely does not cost jobs, and in fact has been known to have a small positive effect on state and local economies.

Who really benefits from a minimum wage raise? Another enduring myth is that the minimum wage only affects teenage workers, and so there should be less priority given to regulating their wage rates. This again is false. Approximately 72% of minimum wage earners are adults, many of whom are hardworking parents with children. Furthermore, many studies suggest that minimum wage hikes increase worker productivity markedly, and so employers benefit. (Padhy 25)

How does increasing the minimum wage affect food prices? Since food-related industries have a larger share of lower wageworkers than other industries, food prices are likely to be more affected by increases in the minimum wage than are prices for other goods. This analysis examines the effects of a minimum wage increase on output prices in the food processing industry and the food-service industry (eating and drinking places) when these industries pass higher labor costs along to consumers in the form of higher prices. (Padhy 26)

Despite the different methodologies, data periods and data sources, most studies found that evidence on price effects, together with the evidence in the literature on wages and employment effects is that the minimum wage increases the wages of the poor, does not destroy too many jobs, and does not raise prices by too much. This evidence is an important input to reconcile theory predictions of negative employment effect and the mixed empirical evidence of negative and non-negative employment effects in the literature. Empirical evidence of positive wage and price effects and non-negative employment effects is consistent with standard theory. This suggests that firms respond to minimum wage increases not by reducing production and employment, but by raising prices.

This is indeed what is observed in practice, as documented by Converse et al. (1981), (Montag 51)

“The most common types of responses to the increase in the minimum wage were price increases and wage ripples. No single type of disemployment response was reported with nearly the frequency of these”.

Supporters of minimum wage increases usually argue that a higher minimum wage will raise the earnings of low-income workers and primarily benefit the poorest working families. Opponents assert that the basic laws of supply and demand suggest that raising the minimum wage will increase the price of labor, and firms will naturally hire fewer most analyses of minimum wage effects workers. If this occurs, the wage have focused on the likelihood of increase could lead to widespread job employment reductions. The firm can absorb the higher labor cost wage primarily benefits the poorest. Economist warns of many problems that can arise due to increases in the minimum wage, the main problem being an increase in the unemployment rate. Minimum wage should be used to encourage new workers to improve themselves so they can command and demand higher wages for their experience and skills. Minimum wage should never be viewed as an end wage but only as a starting wage.


The minimum wage has become a hot topic. The arguments for and against a higher minimum wage boil down to whether the Country’s economy should follow a low-road/low-wage or high- road/high-wage growth path. A low-road strategy involves developing an economy based on mass production, with large numbers of workers hired for low-skill jobs at low wages. A high-road strategy involves developing an information-based economy, which would require a flexible workforce with a high level of skills; such workers would, of course, command higher wages. Legislating an increase in the minimum wage would contribute to accomplishing this task. From the social conscious movement, which has been sweeping the newer generations, it is viewed that a higher minimum wage is needed to keep the lower classes living at a comfortable level. (Montag 221)

Raising the minimum wage is not simply a magic tool to increasing the condition of living for the lower classes in a country; it actually works against that as it brings down the condition of living even further for those who become unemployed. The free market is a beautiful thing, which balances itself out and rewards each participant with that which they input. What is deserved is given and such is the case with wages – an unskilled employee should not be making a wage level which would usually be given to a higher skilled employee, and the minimum wage destroys the balance created by the free market.

Moreover, as findings on the short- and intermediate-term effects of a change in the minimum wage are inconclusive, focus should be made on the long-term effects of raising the minimum wage, which could include raising productivity levels. If the minimum wage had substantial negative effects on the economy or the well being of low-wage workers, then it would have been observed in many

Countries of the world. The reality is that the almost all the countries with minimum

Wages laws and with higher minimum wages have not seen ill effects. This has been shown both in rigorous econometric studies and in assessments of broad economic indicators. These findings confirm what has been seen in a variety of other economic analyses of the minimum wage. While the findings of economists on the minimum wage are certainly not unanimous, the weight of opinion has clearly been moving toward a belief that the minimum wage improves the lives of low-wage workers without adverse consequences. Even, however, if the negative findings of some researchers were to be accurate, minimum wage workers as a whole would be better off, as the temporary losses of the few would be far more than offset by the wage gains of the many. The positive effects of the minimum wage are difficult to dispute. The minimum wage sets a floor for the value of work and lifts the living standards of low-wage workers. Many analysists are convinced that raising the minimum wage will be effective in helping middle class workers maintain their wage levels, at the expense of causing unemployment, hardship and dependency among the poorest and least-skilled workers. (Montag 222)

The Economists on doing their research on consequences of raising minimum wages Should concentrate on how a change in the wage floor would affect one segment of the labor market, poor labors who are at the bottom or teenage workers and not on how it would affect the market as a whole.


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