Minimum Wages and Unemployment Level - Essay Example

COMPARISON OF WAGE RATE BETWEEN US AND UK By Minimum wage effects on employment have been termed as a controversial issue for a very long while. Minimum wage has been characterised to have both supporters and those against it. The benefits that the supporters claim is the minimum wage comes along with improving the standards of living, reduction of poverty levels, reduces inequality and facilitation of proper development of businesses. On the other hand those opposing believe that minimum wage has had a drastic effect in the proper flow of the businesses, employment and poverty levels. An increase in the amount of minimum wage brings about reduction in the employment levels evidently seen with employment elasticity ranging from -0.1 to -0.2 amongst the teenagers and from -0.15 to -0.2 for the youths (Charles, 2002, p 89). Employers in a firm are bounded with the minimum wage law which is meant to prevent the employers from paying their employees rate below the minimum wage. This law is widely used in the present day countries. In UK and the USA, this law was only applicable to the women and the children. The extended use of the law was influenced by the period of the great depression. If the objective of the minimum wage was to ensure that employed achieved a worthy standard of living, then some provisions had to be made for those who are retrenched (Flinn, 2010, p58-62). During the imposition of the minimum wage by the responsible bodies, firms within that jurisdiction would not be permitted to pay less than what the responsible body mandates, for any service that they have received. For instance, this is when the governing body passes legislation that is meant to raise the wage bill from its initial of $6.72 per hour to $8.0 per hour. In line with the above minimum wages, at $8.0, supply of the labour service was 70,000 hours, but only 50,000 hours was what was in demand by the firms. Within a market with voluntary trade, the decisions of firms to hire its employees cannot be influenced with an external body, reason being the quantity of labour needed is normally established through the desire of the firm to buy but not the desire of the workers to sell (Joshua, 1999, p 123). Through the above discussion there is an assumption that, increasing the amount of minimum wage in a country, the number of employed individual would increase. In addition, there is an emerging possibility that everyone would be able to get a job. However, the number of hours that they initially worked would be reduced. Putting this case into consideration, there would be rise in underemployment (Neumark, 2008, p 58-62). Markets are meant to benefit individuals from profits earned from their sales. On the basis of unskilled labour, the minimum wage has a negative impact as seen through reduction in employment levels. The minimum wage is divided into three categories. These are as follows: adult minimum wage, this section, applies to all employees above 15 years. The second is the starting out wage- this applies to the starting out workers. These are the types that apply to workers below 21 years. Lastly is the training minimum wage, which applies to employees aged 21 years and above, who are working under positions that require a certain qualification level (Nigel, 2001, p82). Before the enactment of the minimum wage in 1913, there were numerous studies by various hoc Commissions. Through these studies, there was the formulation of a massive report that entailed the conditions of children and women employment. In addition, through analysis of wages from different competing companies, the conclusion was that there was little reason for the fear minimum wage laws on employment (Joshua, 1999, p 67). Within the United States the minimum wage level has experienced continued increase, with the present one having been set to $7.25 at an hourly rate. In some of its states setting their minimum wage slightly higher than the federal one. This was in an application to businesses in contract with the local authority. Just to mention a few states: State Minimum wage Alaska $7.75 Arizona $7.90 California $8.00 Florida $7.93 Illinois $8.25 (Neumark, 2008, p56) Through the U.S Fair Labour Standard Act of 1938, solution for the prolonged political and legal battles over the states minimum wage law was established. At the start of the minimum wage in 1938, it had been set at $0.38. Because of continued amendments of the minimum wage law, the USA does possess a minimum wage of $7.25 per hour. Through this, the USA government was meant to trickle down economic policies to give entrepreneurs an incentive that can motivate their level of investments. This decision was because of the assumption that the benefits would trickle down to the citizens of the United States. As at 2012, 1.6 million were reported as earning as per the set minimum wage ($7.25) while two million had been reported as earning below the minimum wage. In a couple of the states of the USA, the employers used to pay tipped labour at a minimum rate of $2.13 per hour. Under this form, the tipped labour, in addition to the hourly wage was supposed to be above the minimum wage (Sherk, 2013, p128-132). The following graph represents the wage rate in united States for a couple of years. (Sherk, 2013, p152) The Congress performed the role of raising the minimum wage whenever the unemployment level had dropped low. The early part of 1990 saw the congress enacting a minimum wage act. The act took effect on April the first. This was after the unemployment rate being reported as being 5.4%. It then took further effect in 1996, whereby the unemployment level had dropped to 5.1%. Finally, it took effect once more in 2007, where the unemployment had stood at 4.4%. Since then no vote has been passed because of the drastic rise of the unemployment level to 7.5% after the end of the Great Depression. (Sherk,2013, p 156) Based on recommendations from the new Low Pay Commission (LPC, 1998), there was the introduction of the minimum wage in the UK in 01/04/1999. The UK Labour law contains a legal personality that is binding to the workers, their employers and their trade unions. With the provisions in the employment act, workers in UK are constantly protected from unannounced termination of their employment. This has been made possible through availability of regulations that ensure an employee is informed a month earlier before his dismissal. Thereafter a detailed explanation should be given as to why ones service was terminated. The elderly rate was set at 3.60 sterling pounds per hour, with the preceding level for the youths falling within the age group of 18-21, being set to 3.00 sterling pounds. The hourly rate was faced with subsequent improvements as follows; youth rate rose to 3.20 and adult rate 3.70 sterling pounds per hour. Presently the UK has a minimum wage of $9.83 per hour this is as per the data from ConvergEx group (Great Britain: Parliament: House of Commons: Trade and Industry Committee, 2005). Usually within the UK the grouping of the minimum wages is usually three levelled. Putting into consideration the year 2013, they are as follows: Year 21 and over 18 to 20 18 and under Apprentice 2013 6.31 5.03 3.72 2.68 2012 6.19 4.98 3.68 2.65 2011 6.08 4.98 3.68 2.60 2010 5.93 4.92 3.64 2.50 (Abbott, 2013, p98) Within the UK, the national minimal wage bill is also a source of major controversy, with the cost of livelihood varying from one place to the other. As a result, some places have been regarded as more accommodating than others. This at some point acts as a challenge to employers since they find it a great burden. The size of the aggregate reduction in employment is dependent on the wage increment. The wage should match with the minimum amount and the change in the demand of labour (Great Britain: Parliament: House of Commons: Trade and Industry Committee, 2005). Wage measures advocated for by the UK government to ensure employers could comply with the minimum wage set were as follows; through public humiliation the violators were publicly named and shamed as per the revamped plans that were essential in clamping down on rogue businesses. By doing this, the UK government ensured that the requirements and rights of their employed citizens were protected. For this reason, there was improved living standards amongst various employees (Great Britain: Parliament: House of Commons: Trade and Industry Committee, 2005). The constant increase in the minimum wages for both United States and United Kingdom has had an impact in the reduction of employment levels. This is because increase in the wage level leads to the reduction in the number of job positions. Minimum wage impact is dependent on both the elasticity of demand and supply of the labour force. In the event that the demand on the labour sector is inelastic, its effect on the employment sector is likely to be less severe as compared to when the employer demand of the labour sector is elastic with respect to change in the minimal wage level. As per Keynesians argument with high wages there would be an increased disposable rate of low income workers. Most of the workers possess high propensity to consume, for this reason they would be an increase in their spending. Thus, this would be indicated through the circular income. In addition, the efficiency wage argument states that with the addition of the minimum wage, it would have a positive impact especially in their performance at work. In line with this, they may be motivated to work hard, which would greatly improve on the performance of the business (Great Britain: Parliament: House of Commons: Trade and Industry Committee, 2005). UK possesses a higher minimum wage as compare to the USA an indication that the least payment per hourly rate within the UK is much higher. The following is a graph demonstrating the rate of wage rate in UK. By setting up a low minimum wage, the USA has an opportunity of attracting additional investors. For this reason, the level of unemployment would drastically reduce, there would be increased incidents of worker exploitation in the case of a single employer. By setting up a higher minimum wage, citizens of the UK would appreciate the narrowing of the gap that exists between the highly paid and the lowly paid. Since high wages act as an incentive, the unemployed would seek jobs. In addition, the poverty level among the employed is set to reduced because it would boost the incomes of the middle income. This is evident in households where one member already has a job. Finally through raising of the minimum wage, there would be reduced events of worker exploitation in the case of single employers. A challenge that comes along with high wage is the reluctance of employers to creating jobs by recruiting inexperienced labour force. The risk that the UK faces for having a high wage rate, is that the competitiveness of its goods in the international market might fall as compared to that of USA (minimal wage). Secondly, UK might be faced with a reduction in the level of inward investments because foreign investors might get de-motivated with the raised minimal wage. Thirdly, in the event of a change in the economy, the labour sector might be inflexible. Finally, workers and employers face the risk of being driven into unofficial markets. In conclusion, the rapid growth of the minimum wage of a country is directly proportional to the inability of the unskilled to provide labour. Through the regulation of the increase and decrease of the wage bill by the governing body, the investors, Government and the citizens would benefit. This is because the environment would be favourable. Hence it would be supportive for the growth of different business ventures. The disadvantages attached to the minimum wages are as follows, a high minimum wage brings about inflation since the firms set high pricing for their commodity. As a result of the high wages, most businesses would find it hard not to increase their prices with the slightest change in the minimum wage. This is because the cost of goods would have to rise for the employers to afford paying the employees. Firms would end up closing down because of their inability to scale back or raise prices. In addition, there will be falling of the employment level as a result of contraction of the demand. Finally the labour markets adopts traits of inflexibility. Provisions have to be made that would see to it that the retrenched workers are partly compensated. Reference List Abbott, L. F., 2013. Statutory Minimum Wage Controls: A Critical Review of Their Effects on Labour Markets, Employment and Incomes. London: Industrial Systems Research. Charles, B., 2002. The Effect of the minimum Wage on Employment and Unemployment. Journal of Economic Literature, pp. 487-528. Great Britain: Parliament: House of Commons: Trade and Industry Committee, 2005. UK Employment Regulation: Seventh Report of Session 2004-05. London: The Stationery Office. David, N., 2000. Minimum Wages and Employment; A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. American Economic Review, pp. 1362-1396. Flinn, C. J., 2010. The Minimum Wage and Labor Market Outcomes. New York: MIT Press. Joshua, A., 1999. Empirical Srategies in Labor Economics. Handbook odf the labor Economics, Volume 3. Neumark, D., 2008. Minimum Wages. New York: MIT Press. Nigel, S., 2001. Measuring low pay using the new Earnings Survey and the Labour Force Survey. Labour Market Trends, pp. 55-66. Richard, d., 2001. the National Minimum Wage and Wage Inequality. Centre for Economic performance. Sherk, J., 2013. What is minimum wage: its history and effects on the economy?. New York: John and Sons. steephen, M., 1994. The Effects of Minimum Wages on Wage dispersion and Employment. Evidence from UK Wages Councils, pp. 58-65. Taeil, K., 1995. The Employment Effect in Retail Trade of Californias 1988 Minimum Wage Increase. Journal of Business and Economic statistics, Volume 13, pp. 175-182. Waltman, J. L., 2008. Minimum Wage Policy in Great Britain and the United States. New York: Algora Publishing. Read More