Minimum Wage in the US and Its Effects - Term Paper Example

Micro economics: Minimum Wage in the U.S. and its Effects Introduction The minimum wage that an employee should earnin the United States is typically dictated by the United States federal government. Minimum wage refers to the lowest remuneration, whether hourly, daily, or even monthly, which employers are legally required by to pay to their workers. It can also be considered as the lowest wage at which a worker may sell his or her labor. Minimum wage differs from one country to another and from one state to another in the United States. The US federal government has specified a statutory minimum wage that each employer is entitle to compensate each of his or her employees for services rendered by such an employee. Minimum wage is also controlled by local and state governments, which implies that different states in the US may have different statutory minimum wages. While the statutory minimum wage has significant benefits on workers, it is nevertheless known to have some economic effects on businesses, local employment, and individuals. This paper entails minimum wage in the United States and the associated effects. By July 2009, the US federal government had set an overall minimum wage of at least $7.25 per hour. On the contrary, some municipalities and states in the same country had set minimum wage levels slightly higher than the federal government statutory minimum wage level. In the Washington State for instance, the minimum wage level was set at $9.32 per hour by January 2014 (Washington State Department of Labor and Industries, 2014). Connecticut passed legislation in 2014, on March 26, that advocated for the raise of minimum wage to $10.10 from $8.7 by 2017. It was the first state in the United States to address the call by President Obama to increase minimum wage in the country. Further, Seattle City Council, in Washington passed an ordinance on June 2 2014 to increase the city’s minimum wage to $15 per hour (New York Times Editorial Board, 2014). This legislation placed the city in the topmost position regarding the highest minimum wage in the entire country. Overall Minimum across the United States The overall minimum in the United States wage has remained as $7.25 since it was re-set in 2009, specifically on July 24. This increase was basically the third and the last step of the US Fair Minimum Wage Act of 2007, which had become a low in 2007, on 25th May. It was held by the Supreme Court that this federal minimum wage was constitutional and hardly exceeds the Commerce Cause’s scope in the United States v. Darby Lumber Co. ( U.S. v. DARBY, 312 U.S. 100 (1941) ). Nevertheless, some of the U.S. territories have been exempted from the federal minimum wage, such as American Samoa. Some types of labor have also been exempted from the same statutory. In this regard, employers are required to pay at least $2.13 per hour for tipped labor. This is only allowed given that the tipped income plus the hourly wage is equivalent to or greater than the federal minimum wage. At the same time, workers age under 20 years of age may receive a minimum wage of at least $4.25 per hour, but only for their first 90 days in their calendar employment. This minimum wage level is referred to as the teen, training, or youth wage. Nevertheless, the wage level statutory can only apply if a higher statutory wage level set by the respective state does not exist (U.S. Department of Labor, Wage and Hour Division 1). Given the importance of minimum wage statutory to workers, the Minimum Wage Act was discussed in 2014 April by the US Senate. The resulting bill is expected to create amendment to the Fair Labor Standards Act of 1938 in an attempt to raise the federal minimum wage level for employees, specifically to $10.10 per hour. This would happen within a period of two years. President Barack Obama strongly supported this bill alongside most of the senators in the Democratic Party. Republicans in the Senate however opposed the bill on the basis of the negative effects associated with increased federal minimum wage to the US economy in general. Most people across parties are however in full support for the bill to increase the federal minimum wage (Sullivan). Minimum Wage in Various States As mentioned earlier, minimum wage differs from one state to another in the United States, although the federal minimum wage of $7.25 still exists. The existence of the federal minimum wage implies that no state can set a statutory minimum wage below $7.25 or cumulative tipped wages less than the federal minimum wage, but states can set minimum wages above or equal to $7.25. This applied only to the jobs covered by the federal laws ob minimum wage. For the jobs that are hardly covered by the federal Fair Labor Standard Act, the city, state, or local laws can set a minimum wage lowers than the current federal minimum wage of $7.25 (U.S. Department of Labor, Wage and Hour Division 1). Companies with annual revenue amounting to less than $500,000 and not engaging in interstate commerce are commonly exempted from the federal minimum wage. Table 1 below shows a summary of minimum wages set by the US federal government. Table 1: Federal Statutory Minimum Wages Type of Federal Minimum Wage Level ($/hour) Notes Tipped 2.13 This has to include tips in order to total to not less than $7.25/hour. The employer has to pay the deficit if the total income hardly adds up to $7.25/hour. Non-tipped 7.25 According to the Fair Minimum Wage Act of 2007 Youth 4.25 According to the Fair Minimum Wage Act of 2007, but only for the first 90 days of employment calendar. Figure 1 depicts a clearer presentation of the minimum wage level presented in table 1. Generally, non-tipped minimum wage is the highest at $7.25, followed by youth minimum wage, and tipped minimum wage. Tipped minimum wage is however added up to equal or exceed the non-tipped minimum wage, thereby making youth minimum wage to remain technically the lowest. Figure 1: Graphical presentation of the three types of federal minimum wages Different states as mentioned earlier have different minimum wage levels for tipped, non-tipped, and youth. Table 2 below shows the variations in these types of minimum wages among common states in the United States. Table 1: Minimum Wage within States (U.S. Department of Labor, Wage and Hour Division) State Min Wage ($/h) Tipped ($/h) Youth/Training ($/h) Alabama None Alaska $7.75 $7.75 Arizona $7.90 $4.90 Arkansas $6.25 $2.63 California $9.00 $9.00 Colorado $8.00 $4.98 Connecticut $8.70 $5.69 Delaware $7.75 $2.23 Florida $7.93 $4.91 Georgia $5.15 $2.13 Hawaii $7.25 $7.00 Idaho $7.25 $3.35 Illinois $8.25 $4.95 $7.75 Indiana $7.25 $2.13 Iowa $7.25 $4.35 Kansas $7.25 $2.13 Kentucky $7.25 $2.13 Louisiana None Maine $7.50 $3.75 Maryland $7.25 $3.63 Massachusetts $8.00 $2.63 Michigan $8.15 $2.65 $4.25 Minnesota $8.00 $6.50 for Small Employer   $6.15 for Large employer Mississippi None Missouri $7.50 $3.75 Montana $7.90 $7.90 Nebraska $7.25 $2.13 Nevada $8.25 $8.25 New Hampshire $7.25 $3.27 New Jersey $8.25 $2.13 New Mexico $7.50 $2.13 New York $8.00 Varies North Carolina $7.25 $2.13 North Dakota $7.25 $4.86 Ohio $7.95 $3.98 $7.25 Oklahoma $7.25 $2.13 Oregon $9.10 $9.10 Pennsylvania $7.25 $2.83 Rhode Island $8.00 $2.89 South Carolina None South Dakota $7.25 $2.13 Tennessee None Texas $7.25 $2.13 Utah $7.25 $2.13 Vermont $8.73 $4.23 Virginia $7.25 $2.13 Washington $9.32 $9.32 $7.81 West Virginia $7.25 $5.80 Wisconsin $7.25 $2.33 Wyoming $5.15 $2.13 Table 2 above shows some states with a statutory minimum wage equal to the federal statutory minimum wage of $7.25, such as Hawaii and Illinois among others. Others like Wyoming and Georgia have a statutory minimum wage that is less than $7.25, which could imply that the jobs are not covered in the Fair Labor Standards Act. Most of the states, however, have set their minimum wages at a level higher than the federal minimum wage. Effects of Minimum Wage As defined earlier, minimum wage is typically the prescribed wage level, which should be at least met by employers within all forms of employment according to the Fair Labor Standards Act. From a microeconomics perspective, minimum wage has some favorable and adverse effect on individuals, businesses, and employment. These effects are usually considered when making decisions to adjust the existing statutory minimum wage. Effect of Minimum Wage on Business Minimum wage mostly favors business organization whose labor force comprises of mainly or solely skilled employees. This is because such businesses can set a wage level equal to the minimum wage and still operate above the equilibrium level of labor productivity. On the contrary, firms relying much on unskilled labor face high wage expenses especially when the labor productivity level is far below the statutory minimum wage level. The minimum wage eliminates the ability of businesses to negotiate wages lower than the statutory wage even for the lowest level employees, who are important, but their labor productivity levels is economically lower than the minimum wage level (Ingram). Once the minimum wage level is adjusted, companies employing many unskilled workers face a decrease in their profit margins (Ingram). Effect on Employment An increase in minimum wage has an adverse impact on employment, especially local employment. Minimum wage is perceived by many firms as a massive expense for the firm, especially when dealing with huge numbers of unskilled workers. This perception generates the need to employ strict criteria during hiring processes (Ingram). Many unskilled employees find it difficult to get employment in firms where their labor contributions is economically lower than the respective compensations as required by the local authorities and federal government regarding statutory minimum wage level. Since young individuals entering the workforce are considered unskilled enough to offer labor productivity rate equal or above the minimum wage rate, a 10% increase in minimum wage causes a 5% to 9% decreased employment among youth (Ingram). Some companies increase the prices of their products or services in order to shift the wage increase burden to the consumers, like the case of restaurant price increase in response to an increase in minimum wage as depicted by some economic researchers (Aaronson, French and MacDonald 1). Effect of Minimum Wage on Individuals Increase in minimum wage directly benefits employees within jobs and companies covered by the particular statutory minimum wage legislation. Unskilled workers directly benefits from an increased income since their employers cannot pay them a wage that is below the minimum wage despite their low productivity of labor. This happens to the skilled and the experienced employees as well, because an increase in the lowest wage within an organization has to push all other wages upwards (Ingram). The adverse effect in this case is that some employees may be laid off if the firms face huge expenses to compensate the particular workers, especially the unskilled workers. The remaining workers, if this happens, would have extra workload to handle. Outsourcing or automation of some of the activities may increase among companies in the long-run, which would contribute to further unemployment especially among unskilled workers (Ingram). Conclusion Minimum wage is generally beneficial to employees because it protects them from exploitation by employers. The absence of minimum wage statutory would leave employers with a choice to determine the wage level to offer and compensation for labor services offered by workers. This aspect could be disastrous to the unskilled workers, who would otherwise be used by companies to generate huge profits under poor working conditions and lower compensations. The United States has made significant steps to ensure that minimum wage is regularly increased as a way of ensuring that the minimum wage level is substantial. The real wage would otherwise keep on falling as the general price level in the economy increases. Since the price level keeps in increasing, the minimum wage level has to be increased in order to increase the real wage or keep it a constant level. Nevertheless, it is important to observe the adverse effects of rising minimum wage to avoid increased unemployment level in the economy. To achieve this, most businesses shift they effect of increased wages to consumers in order to maintain the same number of workforce. Works Cited Aaronson, Daniel, Eric French and James MacDonald. Federal Reserve Bank of Chicago: The Minimum Wage, Restaurant Prices, and Labor Market Structure. 3 Aug 2007. Web. 16 Nov 2014. . BLANKINSHIP, DONNA GORDON. Seattle raises minimum wage; will others follow? 3 Jun 2014. Web. 16 Nov 2014. . Ingram, David. The Effects of Minimum Wage From a Microeconomic Perspective. Nov 2014. Web. 16 Nov 2014. . New York Times Editorial Board. Seattle Leads the Way. 7 June 2014. Web. 16 Nov 2014. . Sullivan, Andy. A minimum-wage hike finds hope in U.S. heartland. 15 Sep 2014. Web. 16 Nov 2014. . U.S. Department of Labor, Wage and Hour Division. "Fact Sheet #32: Youth Minimum Wage - Fair Labor Standards Act." FS 32 (2008): 1-3. Print. U.S. v. DARBY, 312 U.S. 100 (1941). No. 312 U.S. 100 312 U.S. 657. U.S. Supreme Court. 3 Feb 1941. Print. Washington State Department of Labor and Industries. Minimum Wage: The 2014 Washington minimum wage is $9.32. January 2014. Web. 16 Nov 2014. . Read More