Why Minimum Wage Helps the Economy
Introduction Hurts Economy Helps Economy
Introduction
Economics is the science that aims to optimize the allocation of resources in society. So, if economists came with the term minimum wage, it definitely must have been for a reason. Let us make a brief overview of the justification of the establishment of a minimum wage in the labor market.
Initiate Effort
A minimum wage is necessary to promote any effort from the part of workers. According to the efficiency theory, there exists a minimum wage, which workers require before investing any effort. If we look at this tendency, we can briefly state that a minimum wage fuels the economy and lays out the fundamentals of productivity.
Provide a Cross-Market Comparative Basis
By implementing a minimum wage, the population can compare their income to the minimum wage. Indeed, a person receiving an income of $6.00/hr knows that his disposable income is low and limited. However, an individual with a payed rate of $10 or $17 will have more disposable income and be able to place money in savings.
Time to Increase?
A major concern dealing with the minimum wage issue is the fact that the federal minimum wage has not been increased in nine years. This has only happened once before, between the years 1981 and 1990. Since there are no imminent plans to increase the federal minimum wage, we are probably looking at at least a tenth year without an increase, meaning that the minimum wage will have remained at $5.15 per hour since 1997.
The main problem with this failure to increase the minimum wage is that it has not been able to keep up with inflation. The real value of the minimum wage today is 14% lower than it was in 1997 and 30% below its peak level in 1968.
The minimum wage has also fallen relative to the average wages earned by production workers and non-supervisors in services. In 2004, the minimum wage relative to the average wage was 33%, its lowest value since 1949.
Another factor to keep in mind is that there are less people today who are working for minimum wage than there were during previous minimum wage increases. This means that an increase would have an even smaller effect on the economy. For example, the 1997 increase affected 9.9 million workers. This number included all the workers who earned wages between the old and new minimum wages. The other two bars show the number of workers that would be affected by an increase to $7.00 and $6.25, subsequently. A possible explanation for this decrease is that several states have already increased their own minimum wage, thus decreasing the national level of workers who work for the federal minimum wage. Also, it is probable that employers have been forced to start paying more than the minimum wage simply because workers are demanding it. The percentages show the percentage of the workforce that is affected.
Effect on Employment
Card and Krueger
A 1995 study performed by economists David Card and Alan Krueger indicated that an increase in minimum wage was positively correlated with an increase in employment, instead of the decrease which had been predicted. Their study compared unemployment and wages in New Jersey and Pennsylvania, specifically in the fast food industry – the leading employer of low-wage workers and a strong enforcer of the minimum wage.
In their study, New Jersey had increased their state minimum wage to $5.05, eighty cents above the federal requirement of $4.25. Pennsylvania’s minimum wage was constant at the federal level throughout the study. In the time period of the study, employment in New Jersey increased relative to that in Pennsylvania, thus defeating claims that an increase in minimum wage would lead to a decrease in employment.
FPI Study
Several other studies have shown that a minimum wage increase has had no negative impact on small businesses – a common fear among minimum wage opponents. For example, a recent study by the FPI (Fiscal Policy Institute) studied the impact of higher minimum wages on small businesses (less than 50 employees). The study compared the outcomes between states with the minimum wage set at the federal level and those whose were above the federal level. The study concluded that small business in states with a higher minimum wage had more growth than those businesses in states at the federal level. This study looks at the years 1998-2001, right after the 1997 federal minimum wage increase.
Flexibility in Minimum Wage Legislation
For those who would still oppose an increase in minimum wage in the US, despite our arguments that it should be increase, perhaps they would be willing to take a different approach to implementing minimum wage legislation in our country. Since it is such a controversial issue, it may be useful to look for ideas in how other countries and states have implemented their own minimum wage legislation. Many countries have no minimum wage legislation at all, while some, such as Australia, require as much as $10.50 US dollars per hour. In the US, the federal minimum wage is currently set at $5.15 per hour, though states and even some cities have the right to increase their own minimum wage as they see fit.
One possibility for minimum wage legislation is to have different brackets of wages for different age groups, such as is the law in the United Kingdom. The way it works there is that for those who are aged 22 and older, the minimum wage is ?5.35 per hour, for those aged 18-21, it is ?4.45, and for those under 18 it is ?3.30. Also in the UK, it is an option that for jobs which require accredited training, the minimum wage may be lowered to ?4.45 for the first six months of the job, so that said training may be completed. This type of legislation might appeal to those who are concerned that minimum wage increases are mostly affecting teen workers, and not going into the pockets of working parents who need the money to support their families.
In several states, including Minnesota, Missouri, Montana, Nevada, and Oklahoma, there are different minimum wage requirements depending on the amount of the business’ gross annual sales. In Minnesota, for example, a large employer (defined as an enterprise with annual receipts of $625,000 or more) is required to pay $6.15 per hour, while a small employer (<$625,000) may pay $5.25 per hour. In many other states, the minimum wage legislation only applies to employers with a certain number of employees, such as in Nebraska where the minimum wage of $5.15 is only applicable to employers of 4 or more workers. This might appeal to those who are worried that small businesses will be hurt by an increase in minimum wage.
Other laws vary the minimum wage depending on the type of business. For example, the Vermont minimum wage is set at $7.25 per hour, but this excludes jobs in retail, service, seasonal amusement and recreation, hotels and motels, restaurants, and transportation employees.
An Increase in Minimum Wage Would Reduce Poverty
An individual who works at minimum wage receives around $10,700 year -- about $6,000 below the 2006 poverty line for a family of three. A minimum wage increase would likely create a positive effect in reducing poverty.
The Federal Earned Income Tax Credit (EITC), a refundable tax credit that supplements the earning of low- and moderate- income workers, is now out of date as the minimum wage has not kept pace with inflation. Indeed, it has not increased since September 1997 which cause minimum wage workers to fall more and more behind each year. If the minimum wage would have kept pace with the rise of price level, it would now be over $8.10. The real inflation value wage in 2006 is now at its lowest point in 50 years.
What workers are interested in is not their nominal wage but their real wage because real wage reflects purchasing power. Consequently, a raise in the price level should be paralleled with an equivalent raise in the nominal wage. Namely, % (P1-P0) = % (W1-W0)
Unfortunately, workers are often being fooled when they get an increase in the nominal wage which is smaller than the increase in the price level. Since economic agents need time to adjust their expectations and incorporated inflation in their expectations the nominal wage rarely gets adjusted to real inflationary levels in the economy.
A minimum wage increase from $5.15 to $7.25 would return the value of full-time work to just above its 1997 level and renew the nation's commitment to working families.
Thus by rising the minimum wage, this would stimulate consumption by increasing the earnings of low-income workers who will spend their entire paycheck (as opposed to higher income groups who would be more likely to save their extra earnings). It also increases the work ethic of these low-income workers, as employers demand more return from the higher cost of hiring these employees. In other words, workers will work harder to find and keep their jobs since employers will be more and more picky as the minimum wage increases.
In another case, the minimum wage provides a “change” which demands employers to use a high productivity strategy rather than a high labor turnover strategy, therefore improving the stock of human capital in an economy.
Limits Capitalistic Exploitation
The law instating the minimum wage requires employers to implement strict timekeeping procedures that accurately capture non-exempt employees’ hours of work (Federal Minimum Wage).
Time Restraints:
- Unauthorized overtime
- Work performed before or after an employee’s regular shift
- Work performed during a lunch period or other break designated as unpaid
- Time spent “catching up” or meeting deadlines, even if it is the employee’s fault that the work is not complete
- Work performed “voluntarily” off the clock
- Work performed off premises or at the employee’s home
OSAH:
Occupational Safety and Health Administartion requires employers to provide a safe workplace for all employees.
Confidentiality:
Prevents most employers from subjecting applicants or employees to a lie detector test.
FMLA
The Family and Medical Leave Act, which requires covered employers to provide up to 12 weeks of unpaid, job-protected leave to eligible employees.
Moderates Discrimination
Moreover, capitalism is characterized by discrimination in the labor market. Discrimination is on a gender, race, or status basis. By hiring women, immigrants, and minorities at a lower wage, the capitalists decrease their ULC (Unit of Labor Cost), and thus, they maximize their surplus. This is detrimental not only to the discriminated group of people who work hard at low wages but also to the non discriminated one who risk losing their jobs because paying them higher wages is obviously not in the best interest of the employers. By setting a minimum wage, the government sets legislative limits to the extent of discrimination. Though this might sound grotesque to any humanitarian, this is an efficient while of course insufficient measure to limits discrimination.
In brief, the minimum wage helps secure workers against any sort of discrimination or exploitation. The minimum wage is instated by the the FLSA, Fair Labor Standarts Act, and can be therefore legally enforced.
The minimum wage sets equal employment opportunities which requires employers to give all applicants an equal opportunity to be hired, and helps prevent employment discrimination on the basis of race, color, religion, sex, national origin, age or disability.
If no minimum wage law was present, an employer would be free to choose any wage he/she wanted to. This would therefore would lead to pay the workers a strict minimum in order to make more profits, thus taking advantage of the workers. A minimum wage forces employers to recognize the inherent worth of human labor.
Conclusion
The last raise of the minimum wage in 1997 has provided an important motivation to the incomes of low-wage workers. The different studies (e.g Card and Krueger) performed have demonstrated that states with a higher wage have not seen any negative effects.
To determine the overall effect of the minimum wage, we need to conduct an elaborate cost-benefit analysis. Such a statistically complicated economic examination is out of the scope of this class, though. So, let us just summarize what the authors of this project are confident to say:
1. Minimum wage is a natural component of an interventionist economy where perfectly free markets are just an imaginary economic model.
2. Minimum wage reduces poverty by providing a necessary minimum standard of living for a larger part of the population.
3. Minimum wage might be used as a significant factor to indicate the state of the economy. Hence, any fluctuation in the minimum wage should signal a direction of movement of the economy.
4. For workers, nominal wage is the immediate signal to interpret events in the labor market. They adjust their expectations though to inflation, though with a lag. Thus, an increase in the minimum wage will have a positive effect on the wealth of laborers if and only if it is an increase in real value, not only nominal.
5. Last but not least, minimum wage sets legal limits to employers' discriminative power.
Even if in cases of the opponent approach who argue negative effects, minimum wage as a whole would be better off.
