Minimum Wage Policy and Its Impact on the Economic Productivity - Example

MINIMUM WAGE POLICY AND ITS IMPACT ON THE ECONOMIC PRODUCTIVITY By of the of the School (University) City Date Overview This paper outlines the macroeconomic indicators and their effects on the general economic status. In particular, the paper explore the economic concepts of minimum wage and its effect on the productivity of the economic through the labor force; its effect on the consumer and government expenditure, GDP, aggregate demand, and economic growth. The paper goes ahead to explore the implications of strict government regulations and labor union policies on future investment economic capacity. The Concept of the Minimum Wage The federal government and other labor unions are after protecting the interest of its workforce by setting legislations that restricts the payments made to the workers in different sector of the economy. The idea of minimum wage has been used in the past in order to create equality and reduce wage disparity that exists in the economy. The minimum wage theory has gained popularity globally given its effectiveness in protecting low income earners within different production sectors. In the U.S. minimum wage is set by the employment act and it differ from one industry to another. Depending on the productivity of each industry or region, minimum wage is determined by the federal government or the states purposely to minimize on exploitation of workers by the employers. However, setting of minimum wage at certain levels often impacts on the economy in general by directly affect the productivity of the labor force. The federal government and other labor unions are after protecting the interest of its workforce by setting legislations that restricts the payments made to the workers in different sector of the economy. The idea of minimum wage has been used in the past in order to create equality and reduce wage disparity that exists in the economy. The minimum wage theory has gained popularity globally given its effectiveness in protecting low income earners within different production sectors. In the U.S. minimum wage is set by the employment act and it differ from one industry to another. Depending on the productivity of each industry or region, minimum wage is determined by the federal government or the states purposely to minimize on exploitation of workers by the employers. However, setting of minimum wage at certain levels often impacts on the economy in general by directly affect the productivity of the labor force. In the U.S., like other developed countries, the state is charged with the responsibility of determining the desirable minimum wage for all the workers in different categories depending on their qualification and experience. Under normal circumstances, the minimum wage for the workers in different sectors must be more than the statutory (state) minimum wage. As at 2009, the federal government, through the labor department mandated an hourly minimum wage of $7.25. The minimum wage was increased to $8.70 in 2011 where it currently stands. Other municipalities and states have set their minimum wage levels above the federally recommended level. As at January 1, 2014, Washington had the highest minimum wage at $9.32. The congress sitting and the Connecticut passed legislation on March 26, 2014 that recommended for the raising of minimum wage to $10.10 from the current $8.70. This targeted the semi-skilled employees. This was in line with President Obama’s proposed amendment to the labor laws. Although the federal government has set up the minimum wage policy, it was reported in 2013 that more than 1.8 million workers in the U.S. earned insignificant amounts that are less than pre-determined minimum wage. On the other hand, only 1.5 million workers were reported to have earned exactly $8.70 per hour in accordance with the minimum wage legislation. In total, the 3.3 million earning either below the wage rate or the exact wage rate represent 1.6% of the U.S. labor force and 1.0% of the total population. Although the U.S. government is committed to improving the living standards across all income groups, this minimum wage still falls below other developed economies that have better wage floor policy compared to the U.S. Globally, Australia has the highest minimum wage at $16.88, with France and New Zealand coming second and third at $12.09 and $11.18 respectively. Despite the high minimum wage, Australia has never has economic recession over the last 20 years, but instead, the country has posted steady economic growth. Although set at $7.25 per hour, the minimum wage policy in the U.S. is not applicable to all sector or all employees. For instance, some states such as American Samoa are exempted from the minimum wage legislation. The minimum wage regulations are also not relevant in for persons or workers aged below 20. Categorized as trainees or teens, those aged below twenty years are subjected to training wage of approximately $4.25 per hour unless a state set a minimum wage for this category. Minimum Wage and Economic Indicators According to Keynesians, unemployment is an economic state where people willing and ready to offer their services at the prevailing wage rates and are actively in search of employment opportunities cannot get work. From the Classical Economists’ point of view, market mechanisms are the primary reason behind the rise in unemployment. The relationship between employment and GDP is established by the Okun’s Law which states that a one percent GDP growth leads to a two percent rise in employment and vice-versa (OSullivan and Sheffrin, 2003; 332). Therefore, any significant fall in the GDP causes an increase in the level of unemployment in the economy, as established by the forces of demand and supply. Therefore, unemployment negatively impacts on the GDP, hence, the economy in general. On the other hand, unemployment leads to a significant decline in the aggregate demand for goods and services in the economy (Vedder and Gallaway, 1997; 98). This is attributed to the fact that with unemployment, the disposable income of the consumers drops, hence, limiting their consumption and spending. Such a drop in the income power of the consumers further affect the economic growth rate and the GDP in general. The Australian School of theories is opposed to labor market interventions since they increase the rate of unemployment. According to this school of thought, unionization, minimum wage policy, bureaucratic work rules, and taxation, among other labor union regulations discourages hiring of workers as was the case in Toyota Australia (Romer, 2011; 456). Unfavorable labor union and state regulations on the labor market such as minimum wage and maximum working hours adversely increase the wage bills, thus, increasing the production costs (Romer, 2011; 487-8). This in turn reduces the profitability index of the company, hence, scaring away potential investors. Change in the business cycle creates unemployment. In particular, cyclical unemployment arises from economic recessions characterized by high production costs and low demand in the economy. This in turn leaves the employers with little alternative but to lay-off some workers, hence, increase in the rate of unemployment. In addition, with the decline in the aggregate demand following harsh economic conditions, the volume of sales are likely to drop, thereby, reducing the revenue generate from the sales (OSullivan, and Sheffrin, 2003; 339). Besides, a rise in the rate of unemployment increases government expenditure in compensation and unemployment benefits. The government will have to dig deeper into its spending to accommodate the unemployed persons. International trade deals with good, service and payment flows between different countries and policies that regulate these flows and their national wealth effects. It is the trade that deals with the physical goods exchange among many countries and the problems that arise from these transactions (Bauman, 2000; 121-2). There is also the international finance that deals with policies regulating foreign trade markets, the balance of payments and imbalances. The first step to advance the theory of internationalization of the world economy was put forward by Adam Smith. Smith had certain assumptions highlighted below: the real sector and monetary exchanges are independent of each other; prices are elastic and can be determined under perfect competition; factors of production tend to be mobile internally (within countries), but immobile between countries (Spybey, 1996; 55). He also suggests that the level of technology may be similar within countries but vary among different countries. Moreover, the tastes of consumers are a constant that cannot be affected by international trade. The distribution of income also ought to be constant in such an international market, and there should be no trade barriers (McBride and Wiseman, 2000; 123-4). The major distinction between globalization and internationalization is in the form of technology. Globalization is more about the use of the new communication and communication technologies including the application of information systems. On the other hand, internalization is more focused on the physical trade among different countries. Internalization of the world economy is also a concept that has been made possible through the advancement in the transportation industry. Such advancements make it possible for people from a different country to gain access to other countries of the world and trade. Again, the radicals fight for freedom and penetration to different countries to physically trade without government restrictions. They are positive about the fact that the global economy is becoming more internationalized. Moreover, they seek to increase this internationalization so that the physical goods and services can move freely between countries. Realists also hold similar sentiments (Nye and Donahue, 2000; 198). They also believe that internationalization is a positive concept that should be nurtured to deliver value to countries and their citizens. Internalization makes it easy for countries to export and import the goods and services they produce. It is a timely concept that may have disadvantages, but whose advantages outweigh the demerits. The advances in the transport industry continue to make internalization feasible, and if the trend continues, the worlds economy will continue to get more internationalized (Sullivan, 2000; 72). The growth in the use of common international languages such as English and information literacy is the ingredients that will continue to make internationalization a reality that the world and its skeptics will have to contend with. Internationalization is not a societal vice, but a tool towards progress that every society that seeks progress must welcome with both hands (Archibugi, and Michie, 1997; 67). It is a concept that has come at the right time and should be guarded and allowed to see many generations to come. Skeptics may not believe in the concept of internalization, being the cynical individuals that they are. However, the realists have proved that this is a phenomenon that will live to see the light of day. The issue of the westernization of the world’s economy is very critical and controversial one. Economies are greatly affected by other factors such as cultures, politics and religion. Many aspects of the western culture have spread across the globe making it possible for many to be tempted to think that the world’s economy is soon getting westernized. Some of the traditional cultures that used to be prominent in some continents such as Africa are slowly fading and getting replaced by the western culture (Nye and Donahue, 2000; 117). They disappear and get marginalized. Aspects such as western clothing are taking shape across the globe. In India, the traditional men’s wear is slowly going into extinction. Winners and Losers of the Minimum Wage Hike The Federal government enacted minimum wage legislations that proposed an increase in the minimum wages with the primary aim of protecting low earners. This policy enactment has raised questions regarding its economic implications. The timing of the 11 percent minimum wage rise approved by the Congress was awkward. Different arguments have presented concerning the economic consequences of this law that with come in effect by July, 2014. According to Professor Gibbs, although the move was right in protecting the interests of the low socio-economic class, the timing is inappropriate. He reasons that given the high rate of unemployment and low inflation current being experienced in U.S., the introduction of the minimum wage policy will further hurt the economy. The most affected groups are likely to be the students in search for summer jobs and internships. With more than 31 states affected by the new law, more than 4.5 million workers are likely to benefit from this legislation. On the other hand, employers will have to incur more recurrent expenditures, hence pitting employers against employees and triggering the common historical industrial unrests. These new wage rates will be beneficial to the employees as their disposable incomes will significantly increase, thus, an increase in their purchasing powers. To the employers (companies), the news comes at a gloomy economic climate, and any hike in wages would be a setback to the pricing and hiring capacity of these firms. With the unemployment rate reaching a record high in nearly 26 years, the mandated wage hike will be a major setback to job seekers, especially those in search for entry-level positions or temporary employment such as students on summer vocation. According to the 2008 Journal of Labor Research, a 10 percent minimum wage hike causes a 1.0 percent decrease in small-business and retail employment. Since the minimum wage policy targets low-skilled positions, a hike in the wage demand would exacerbate teen’s unemployment rate as employers may decide to reduce their employment capacity for low-wage labor and semi-skilled employers. Employers would prefer elevating part-time employees to full-time rather than hiring semi-skilled and low-wage groups. Gibbs further argued that the wage hike will increase the cost of living as companies will shift the burden to the consumers through price increase. Unemployment and the Minimum Wage Policy According to Keynesians, unemployment is an economic state where people willing and ready to offer their services at the prevailing wage rates and are actively in search of employment opportunities cannot get work. From the Classical Economists’ point of view, market mechanisms are the primary reason behind the rise in unemployment. The relationship between employment and GDP is established by the Okun’s Law which states that a one percent GDP growth leads to a two percent rise in employment and vice-versa (OSullivan and Sheffrin, 2003; 332). Therefore, any significant fall in the GDP causes an increase in the level of unemployment in the economy, as established by the forces of demand and supply. Therefore, unemployment negatively impacts on the GDP, hence, the economy in general. On the other hand, unemployment leads to a significant decline in the aggregate demand for goods and services in the economy (Vedder and Gallaway, 1997; 98). This is attributed to the fact that with unemployment, the disposable income of the consumers drops, hence, limiting their consumption and spending. Such a drop in the income power of the consumers further affect the economic growth rate and the GDP in general. The Australian School of theories is opposed to labor market interventions since they increase the rate of unemployment. According to this school of thought, unionization, minimum wage policy, bureaucratic work rules, and taxation, among other labor union regulations discourages hiring of workers as was the case in Toyota Australia (Romer, 2011; 456). Unfavorable labor union and state regulations on the labor market such as minimum wage and maximum working hours adversely increase the wage bills, thus, increasing the production costs (Romer, 2011; 487-8). This in turn reduces the profitability index of the company, hence, scaring away potential investors. Change in the business cycle creates unemployment. In particular, cyclical unemployment arises from economic recessions characterized by high production costs and low demand in the economy. This in turn leaves the employers with little alternative but to lay-off some workers, hence, increase in the rate of unemployment. In addition, with the decline in the aggregate demand following harsh economic conditions, the volume of sales are likely to drop, thereby, reducing the revenue generate from the sales (OSullivan, and Sheffrin, 2003; 339). Besides, a rise in the rate of unemployment increases government expenditure in compensation and unemployment benefits. The government will have to dig deeper into its spending to accommodate the unemployed persons. Conclusion In summation, minimum wage plays a critical role in the economic growth and development. For this reason, opposite forces and factors to employment are detrimental to the economic capacity of a country. Like was the case of the U.S., unemployment limited the economic power of the consumers, with the possible consequences being a fall in consumer expenditure, increase in government spending, low economic growth and development, and decline in the productive capacity of the economy. Bibliography Cunningham, W. V. 2007, Minimum Wages and Social Policy: Lessons from Developing Countries. Washington, DC: World Bank. Kosters, M. H. 1996, The Effects of the Minimum Wage on Employment. Washington, DC: AEI Press. Levin-Waldman, O. M. 2001, The Case of the Minimum Wage: Competing Policy Models. Albany: State Univ. of New York Press. OSullivan, A. and Sheffrin, M. 2003. Economics: Principles in Action. Upper Saddle River, NJ: Pearson Prentice Hall. pp. 330-339. Romer, D. 2011, "Unemployment". Advanced Macroeconomics (Fourth ed.). New York: McGraw-Hill. pp. 456–512. Vedder, R. and Gallaway, L. 1997. Out of Work: Unemployment and Government in the Twentieth-Century America. New York: NYU Press. Read More