The Minimum Wage Law - Essay Example

The Minimum Wage Law Introduction The federal minimum wage law was introduced in the year 1938. The US was in grave economic jeopardy, on account of the Great Depression, which lasted from 1929 to the early 1940’s. The enactment of the federal minimum wage law provided an appreciable measure of relief to employees, who were now assured of at least 25cents an hour with a 44 hour weekly work ceiling. This act clearly stated that the wages paid to an employee were to be adequate to ensure a standard of living that was essential for general well – being, efficiency and health. However, such minimum wages were not to bring about any appreciable reduction in employment. 1 From the period, there have been several debates over the advantages and disadvantages of a minimum wage. The detractors of the minimum wage have rightly pointed out that it tends to reduce jobs. This has been countered by the proponents of the minimum wage who contend that it enhances the purchasing power of the consumer and also increases productivity. Discussion The purchasing of the federal minimum wage had risen to its highest in the year 1968 when the minimum wage for an hour's work could purchase 5 gallons of gasoline. This underwent a gradual but consistent decline, and by the year 2006, the minimum hourly wage could barely procure 2 gallons of gasoline. The minimum wage is not uniform across the states, and some of the states have mandated much higher minimum wages. For example, Washington obliges employers to pay $8.55 per hour. 2 A major issue relates to the fact the minimum wage, in real dollar terms; fell by 22%, in the period 1973 to 2007. During this time the profits of the corporate sector increased by more than 50%, which significantly increased the gap between the rich and poor. 3 In the year 2007, it was envisaged that the proposed federal minimum wage increase would prove beneficial to a large number of American workers. Approximately, 5.6 million workers are likely to be direct beneficiaries, with a 41% enhancement in pay. In addition, around 7.4 million workers are expected to derive an indirect benefit. All said and done, such benefit will be provided to some 13 million workers.4 The chief beneficiaries of this increase in minimum wages will be adults, who constitute 79% of this group. Of these beneficiaries, women constitute 59%. This increase in minimum wage serves to benefit individuals as well as families. It is important to note that women constitute half of the minimum wage earners. Consequently, the economic gender gap is reduced substantially, due to increase in the minimum wage. Moreover, 1.2 million of these workers are single parents and most of these people are women.5 It is indispensable to increase the minimum wage, in order to restore its value. However, the federal minimum wage does not take inflation into account. As a result, the value of the minimum wage decreases with increasing inflation. In this situation, it is necessary for Congress to enhance the minimum wage suitably. Thus, we find that the federal minimum wage is a mere 31% of the average hourly wage. 6 The burgeoning US economy makes it very difficult for the minimum wage earners to survive. This can be attributed to the continuous increase in goods and services. Unlike other workers, who are provided compensation for inflation, the minimum wage earners do not experience an increase in their wages. This inequitable situation has persisted for a decade. Another issue that cripples the minimum wage earner is the increase in wage inequality, due to the decrease in the real value of minimum wages, consequent to an increase in inflation. 7 An increase in the federal minimum wage does not result in an increase in unemployment. This had been conclusively established in a study conducted by the Economic Policy Institute, for the period 1996 to 1997. Furthermore, several contemporary studies have clearly shown that the market had obtained far superior results from 1996 – 1997. 8 One of the major reasons for this welcome development is that higher wages act as an incentive to perform better. This, in turn, increases productivity and reduces the costs associated with providing training to workers and recruiting workers. Consequently, employers are able to bear the additional burden posed by higher wages, without having to retrench their workforce. Several scholars consider the strategy of increasing the federal minimum wage to be effective in mitigating poverty. In their considered opinion, such increase in the federal minimum wage enhances the standard of living of workers and families that have a low income.9 Nevertheless, the effects on poverty are unclear if an increase in the federal minimum wage results in a reduction in employment. On the other hand, some studies have disclosed that the federal minimum wage increase of 1990 – 1991 did not have any significant effect in lowering poverty rates. This incongruity in results makes it difficult for policymakers. There is an urgent need for studies to be conducted in these areas at the level of the states, due to the fact that welfare programs have been delegated to the states by the federal government.10 Increasing the federal minimum wage can affect poverty and wage disparity. However, the effect on family income inequality or poverty rates is not significant, if the minimum wage earners are uniformly distributed, from the perspective of the income distribution. Thus, a few studies had revealed that the distribution of minimum wage earners across income distribution was dispersed to the extent that it had scant effect on family income inequality or poverty rates.11 During the period 1984 to 1998, it was observed that there had been an annual decrease of 1% in the poverty rate for all families. This corresponded to an insignificant increase in the real federal minimum wage, which had been more or less stagnant at 0.04%.12 In addition, Wage theft or failure to pay minimum wages are commonplace among the smaller enterprises. Some examples are housekeeping and construction companies, car washes, farms, and restaurants. The principal victims of wage theft are low wage workers and illegal immigrants. This is on account of the fact that such workers do not have the wherewithal to recover their wages or to contest wage theft by their employers.13 In the Midwestern United States, wage theft is prevalent among the low wage earners and immigrant workers. However, this insidious practice is to be encountered all over the country. In addition, wage theft tends to affect several workers belonging to the middle-income group and legal citizens. Moreover, wage theft is independent of the physical characteristics of the workers. 14 At the time of the enactment of the Fair Labor Standards Act (FLSA), the minimum wage had been fixed at 25cents per hour. This has increased to $ 7.25, as of 2010. 15 The FLSA stipulates that every worker should be paid at least $7.25 per hour for work in the commercial sector, and there is no room for any exceptions. With the advent of the FLSA, it became incumbent for the government to right to minimum wage. This duty was thrust upon the government with the establishment of the Department of Labor's Wage and Hour Division. 16 The prevalence of wage theft can be attributed to the failure of the Wage and Hour Division to enforce the right to a minimum wage. A major drawback lies in the fact that the Agency failed to explicitly define the term protected employee under the FLSA. This has proved to be a major stumbling block in enforcing the right to a minimum wage.17 This dismal situation has been compounded by the drastic paucity of resources and staff that the Agency labors under. As a result, it has not been very effective in discharging its enforcement and investigative duties. In addition, the penalties imposed by the Wage and Hour Division are not sufficiently stringent. This has contributed to its failure to adequately enforce and supervise the right to a federal minimum wage. Another major failure of the Wage and Hour Division relates to its ambiguous interpretation regarding workers who are afforded protection under the FLSA. This lacuna has promoted wage theft while hindering enforcement. Subsequent to the enactment of the FLSA, every worker has the right to be paid, at least, the federal minimum wage.18 Apparently, the FLSA stipulates that every worker is entitled to the federal minimum wage. However, the failure of the Agency to determine explicitly, the individuals that can be classified as covered employees have fostered wage theft. The outcome has been the inability of the Wage and Hour Division to properly enforce the FLSA. In addition, the paucity of resources in the Wage and Hour Division has contributed to the failure of the Agency to enforce the federal minimum wage. There are costs and benefits associated with a federal minimum wage. Some of the people obtain a higher income, as a benefit of the minimum wage. On the other hand, a few people remain unemployed, due to the stipulation of a minimum wage. Hence, a 10% increase in the federal minimum wage would result in a decrease of 1 to 3% in their employment.19 Wage elasticity is an important parameter. Brown et al published a paper in 1982, which disclosed that the wage elasticity for low skilled workers ranged between – 0.1 to – 0.3. 20 Moreover, the minimum wage has several unintended outcomes. For instance, it generates unemployment, as there are more workers available at the higher wage rates than the employers desire to hire. There is a strong call for discarding the minimum wage requirement. A major benefit of this would be the generation of job opportunities, which in turn would provide an opportunity to obtain experience that could prove to be of tremendous benefit in obtaining higher wages in the future. In addition, employers and investors could employ individuals without having to fear action from the authorities, for having paid less than the minimum wage.21 The principal victims of the unemployment burden are young workers and low skilled workers. Thus, the federal minimum wage requirement has a major influence on the employment of individuals who are less than 25 years old. People in this age group constitute 50% of the minimum wage workforce. 19% of the teenagers on hourly wages obtained the absolute minimum wage or less than that. A bare 2% of the full-time hourly workers had obtained the minimum wage.22 Thus, the minimum wage renders youngsters unemployable, while curtailing the capacity of the older full-time workers to support a family. There was a 41% enhancement in the federal minimum wage between the years 2007 and 2009, which resulted in an increase in the minimum wage per hour from $5.15 to $ 7.25. The fallout of this increase was a reduction of 98,000 jobs or 6.9% reduction in jobs, among those belonging to the age group of 16 to 19 years. This data was made available by the Employment Policies Institute. 23 The official government data indicate an unemployment rate of 7.9% among adult women and 9.7% among adult males. This is in sharp contrast to the unemployment rate among teenagers, which is a huge 26%. A disturbing fact is that 40% of the black teenagers are unemployed. This increase in the federal minimum wage had a significant impact on several states in the Great Plains and the South. For instance, in Tennessee, there was an 8.2% decrease in the employment of teenagers. The repeal of the federal minimum wage requirement would provide most of these youth with jobs. In addition, the Northeast, Midwest and West Coast have higher minimum wage requirements. 24 Job growth could be improved in these regions by repealing the minimum wage requirement. If the state of local laws prescribe a minimum wage that is greater than the federal minimum wage, then the FLSA defers to such laws. Accordingly, an employer has to pay the higher minimum wage to an employee, or in other words, the employer has to comply with the law that is more favorable to the employee. As of the year 2006, 45 states had prescribed a minimum wage. 15 of these states had fixed the hourly minimum wage at $5.15. 30 other states had prescribed a minimum wage that was higher than the federal minimum wage. 25 Moreover, several of the states have enacted laws to increase the minimum wage above that prescribed by the federal minimum wage. Thus, in the year 2006, Maine’s employees were assured of a minimum hourly wage of $6.75, which was subsequently enhanced to $7 in 2007.26 In West Virginia, the minimum wage was increased from $5.85 to $6.55 in 2007 and $7.25 in 2008. Thus, several of the states were seen to engage in a stepwise increase in the minimum wage. For example in Michigan, the minimum wage was increased from $5.15 to $7.40 in three stages by the year 2006. 27 The main disadvantage with the imposition of a minimum wage is that the pay relationships are altered in the pay plan. Minimum wage changes could be substantial to the extent that the employer would be hard pressed to implement similar changes in the other levels of the pay plan of the organization. Thus, there would be an increase in the salary paid to those employed in lower level jobs, without any corresponding increase in the salary paid to the higher pay levels. 28 Another major difficulty faced by employers is that their salary expenditure is generally projected a year in advance. These projections take into account employee pay rates, number of staff and pay adjustments. Employers are usually caught unawares when a minimum wage law is passed by a state legislature or Congress. Such law has to be complied with in a short period of time, such as 2 to 6 months.29 Conclusion The federal minimum wage serves to establish the lowest amount per hour that employers must pay their workers. Those who support a minimum wage contend that this intervention enhances the income of society's low-income workers. However, the fact remains that minimum wages cannot achieve this outcome; and on the other hand, tend to exacerbate the economic condition of the very people that they seek to benefit. In the face of incontrovertible evidence, it has to be conceded that a minimum wage has the capacity to cause considerable harm. A high minimum wage results in reduced employment levels, and fewer benefits and training. Some of the most distressing features of the minimum wage are that it leads to less training and fewer employment opportunities, which tends to have a negative impact on higher wages. Consequently, it would be inadvisable to promote a minimum wage regime, as this would reduce employment drastically. From the perspective of supply and demand, it would be advisable to rescind laws relating to the minimum wage. Such a course of action would demonstrate that prosperity results from improving production and not the reallocation of wealth. It is essential to realize that even a low paying job is better than being unemployed. Thus, it can be surmised from the above discussion that minimum wage laws, in general, result in the enhancement of unemployment and wage theft. Ambiguity in interpreting the provisions of the law and the absence of strong enforcement measures have a negative effect on the success of the relevant law. Employers take advantage of such lacunae, in order to derive the maximum benefit at the cost of the interests of the low wage earner. Works Cited Brown, C, et al. “The Effect of the Minimum Wage on Employment and Unemployment.” Journal of Economic Literature, 20.2 (1982): 487 – 528. Print. Carden, Art. “Scrap the Minimum Wage.” Forbes, 186.4 (2010): 66 – 67. Print. Fact Sheet: “Fair Minimum Wage Act of 2007”, Web. 9 Oct. 2011 . Fitzpatrick, Laura. “The Minimum Wage.” Time, 174.4 (2009): 18. Print. Hubbartt, William S. “minimum wage maximum impact.” Parks & Recreation, 42.9 (2007): 92 – 97. Print. Humphreys, John. “A Fresh Look at Labour Markets.” Policy, 26.1 (2010): 26 – 32. Print. Palo, Todd A. “Minimum wage – Law & legislation.” Seton Hall Legislative Journal, 35.1 (2010): 36 – 60. Print. Stevans, Lonnie K, and David N Sessions. “Minimum Wage Policy and Poverty in the United States.” International Review of Applied Economics, 15.1 (2001): 65 – 75. Print. Read More