Pros and Cons of Increasing the Minimum Wage
The minimum wage is the lowest pay that an employer can legally compensate workers and goes beyond employer-employee collective agreements and individual contracts. In the United States, the federal government has a prescribed minimum wage, and state administrations also have their wage policies which may differ with that of the central government. The wage issue in the contemporary world is a significant concern where some economic experts advocate for its increase while others bear a contrary opinion (Kops, 2017). The increase of minimum wage is regarded as a legislative approach to protect the low-income earners against exploitation by employers. However, the involvement of government in increasing the employee’s salary contravenes the provisions of supply and demand that are effective in setting the market prices in a freely competitive market thereby impacting the economy negatively.
Pros of Increasing the Minimum Wage
During the great recession in the United states, the unemployment rate tolled at 25% and employers took advantage of the desperation of the citizens to pay them very little. As a response mechanism, the policymakers instituted the minimum wage. The underlying merits of a rise in minimum salary focuses on the financial well-being of unskilled and semi-skilled workers and the reduction of the poverty index. When wage restrictions are not set, the employers tend to exploit the workers through low pay, thus impoverishing them. Some of the pros of increasing the minimum wage includes:
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According to Smith, poverty is a global challenge. In 1995, the United States had the second highest GDP worldwide but was ranked third in the highest poverty among the developed countries (2015). The statistics are an indication that a state may be economically stable but still have a significant proportion of its population living in abject poverty. Raising the minimum wage ensures that the gap between the rich and the poor is breached, acting as a wealth distribution strategy. Over the years since 1995, the minimum wage in the United States has experienced a considerable increase and consequently a drop in the poverty scale where they are currently ranked number 17 in highest poverty scale among developed nations. The rise in the minimum wage, therefore, increases the purchasing power of the poor leading to reduced poverty.
Increasing the minimum wage ensures circulation of money in the economy in different ways. The increase is an economic stimulus because minimum wage workers earn more money which translates to an increased capacity to spend on personal, household, and investment needs thereby promoting trade. The increased spending creates demand for products and services which supports economic growth. As more businesses are opened or expanded to cater for the increase in demand, more employment opportunities are created leading to reduced unemployment. Increased employment rate lead to increased tax revenues which the government spends on developing infrastructure like transport systems that promote economic growth. Increase in minimum wage also means that low-income earners get enough money to support their families with little or no government assistance (Neumark & Wascher, 2008). The reduced dependence on government aid by the people ensures that government revenue is used in projects that advance the United States economy.
Decreased Turnover Rate and Income Inequality
The primary argument against the increase of the minimum wage is that it hurts the employers at the expense of the employees. However, the assumption is not the correct because employee turnover is at the highest when the employees are dissatisfied, which is a challenge for employers. When the minimum wage is increased, the tendency of workers to quit or change jobs is low and thus employers do not lose competent and highly qualified employees to competitors. Decreased turnover rate results in reduced hiring and employee training expenses. Historically, women and people from minority groups have been victims of gender inequality. Raising the minimum wage helps to reduce race-based and gender-based income inequality.
Cons of Increasing the Minimum Wage
Economists who oppose the increasing of the minimum wage argue that raising the workers’ pay has a negative impact not only to the employers but also to the employees and the economy (Belman & Wolfson, 2014). Labor is a primary component of the production cost which should always be maintained at the minimum level for business sustainability. Inflation results from an increase in the production costs which elevates the product value. A rise in employee pay leads to wage-push inflation which refers to a rise in production costs and consequently cost of products which leads to a loss of currency value. Increase in wage is therefore directly associated with a higher cost of goods and inflation (Peneva & Rudd, 2017).
Employees in different industries are compensated differently based on the level of productivity. Economically, it is not logical to pay an employee $15 or more per hour when their actual productivity is lower than that; let’s say $10 because it would lead to loss and consequently failure of business entities. Following the principles of supply and demand, the rise of production cost results to increase in the cost of products that decreases demand which prompts organizations to cut down the production quantity. Firms, therefore, demand less labor and as a result, employers lay off redundant employees leading to an escalation of unemployment.
When a country has most of its citizens unemployed, there is reduced economic growth as the tax collection declines (Kosters, 1996). The government revenue that is used in promoting the nation’s infrastructure decreases leading to the reduced infrastructural development which influences economic growth. With increased unemployment rates, the poverty rate increases which ultimately can help lead to crime, drug abuse, and other illegal activities out of desperation. Increase in minimum wage also prompts innovativeness as business owners acquire an incentive to use machines in place of human labor. As a result of increased labor costs, employers have been rapidly shifting from manual production to automation (Wolfram, 2017). For example, robots are being increasingly invented to carry out routine activities in a variety of industries such as the food industry, manufacturing, transport among others leading to loss of jobs.
Increase in minimum wage interferes with the competitiveness of business firms, particularly the internationally operating businesses. Countries with higher wages lead to the collapse of firms or the increase in the cost of products. As a result, consumers prefer buying from cheap overseas markets. The gross domestic product (GDP) therefore decreases because a considerable portion of the country resources are invested in other countries leading to loss of revenue. Import dependency also destroys domestic industries, thus, derailing economic growth. The government bears a responsibility against its citizens of providing trade incentives to local producers and raising the minimum wage discourages local investors. In California, the increase in the hourly minimum wage to $15 by 2022 has started yielding warning signs where many businesses have started leaving the state or closing down. Research suggests that full implementation of the policy in California will lead to considerable collapse business entities (Saltsman, 2017).
Increasing minimum wage is likely to increase the burden on employers resulting in slower growth of businesses and increased unemployment rates. For example, a majority of organizations in the United States operate with a fixed compensation budget and an increase in the wage rates would result to slower hiring and increase layoffs. The wage limits imposed by the government are sometimes political and are not based on cost-benefit analysis. The arbitrary setting of the minimum wage is not optimal because different industries have different prevailing factors and it would be inappropriate to treat all the sectors in an economy equally because different market segments operate in varying settings. The implementation and monitoring of a minimum wage increasement is an expensive function making it an unnecessary economic burden.
Therefore, labor market should be treated like other markets where the costs are determined by the market conditions. The wages determined by the market eliminates the challenge or arbitrary fixation of the wage rate since different industries can set appropriate compensation which is flexible depending on the market trends. Raising the minimum wage denies a lot of people the opportunity to acquire internship opportunities, therefore, missing the learning platform that equips unskilled and semi-skilled people with the skills and experience necessary for future employment. Some people would be willing to work for a salary lower than the minimum wage and increasing the rates deny them the opportunity. Where employers can comply with the wage increasement policies, they counteract the economic implications with reduced employee benefits like on-the-job training, reduced working hours, the abolition of overtime, and reduced quality of work environment among others. Rather than increasing the minimum wage, the principles of demand and supply should be allowed to determine the appropriate compensation for the economic benefits of both the employer and the employees.
The primary objective of increasing the minimum wage is to discourage employers from exploiting their workers through low pay. Increasing the minimum wage helps in reducing the poverty levels in a country by ensuring that workers get more money to improve their living standards. Increased minimum wage also promotes economic growth, decreasing the turnover rate and income inequality. However, raising the minimum wage poses less good than harm to the employers, employees and the economy. Some of the negative impacts of increasing minimum wage include causing inflation, increased unemployment and fall of domestic industries leading to import dependency. Market forces of supply and demand are useful in determining the cost of production factors like raw materials, and price of products.
I personally feel that minimum wage should be increased but should happen in a fashion that would align with the present state of the economy. According to The U.S. Department of Labor, the current federal minimum wage is $7.25/per hour and it has been set that way since 2009 (2018). I feel that this current minimum wage is too low for today’s standards of what many may consider being able to live comfortably. Drastically increasing the minimum wage to $15/hour would do more harm than good in terms of the impact it would have on employers; thus, it would eliminate jobs. Therefore, the federal government should investigate adjusting the federal minimum wage every 5 years, so the current financial costs of living align somewhat more even with the minimum wage. This would also help employers ease the burden of the wage increase.
- Belman, D., & Wolfson, P. J. (2014). What does the minimum wage do?. Kalamazoo, Michigan W.E. Upjohn Institute for Employment Research.
- Kops, D. (2017). Economists still cannot decide whether the minimum wage is a good thing. Quartz. Retrieved from: https://qz.com/1034952/economists-still-cant-decide-whether-the-minimum-wage-is-a-good-thing/
- Kosters, M. H. (1996). The effects of the minimum wage on employment. Washington, D.C: AEI Press.
- Neumark, D., & Wascher, W. L. (2008). Minimum wages. Cambridge, Mass: MIT Press.
- Peneva, E. V., & Rudd, J. B. (2017). The Pass-through of Labor Costs to Price Inflation. Journal of Money, Credit and Banking, 49(8), 1777-1802.
- Saltsman, M. (2017). Why the $15 minimum wage will cost California 400,000 Jobs. Forbes. Retrieved from: https://www.forbes.com/sites/michaelsaltsman/2017/12/15/why-the-15-minimum-wage-will-cost-california-400000-jobs/#31ed6e0943b9
- Smith, L. (2015). Reforming the minimum wage: Toward a psychological perspective. American Psychologist, 70(6), 557??“565.
- U.S. Department of Labor. (2018). U.S. Department of Labor. Retrieved November 15, 2018, from https://www.dol.gov/general/topic/wages/minimumwage
- Wolfram. G. (2017). A case against the minimum wage. Forbes. Retrieved from: https://www.forbes.com/sites/realspin/2017/09/12/a-case-against-the-minimum-wage/#285353c7499e