Minimum Wage and Inflation - Essay Example

It is estimated that up to a minimum wage of $11 per hour is required to keep families out of poverty. There are two opposing opinions to the debate on whether to tie the minimum wage to inflation. Opponents claim that the move to increase the minimum wage could result in job loss while proponents believe that this is a good move that will improve the purchasing power of households. My position is that the minimum wage should be raised and should automatically increase with inflation.

Proponents
Several reasons have been fronted by the proponents of the debate on tying wages to the inflation level in the economy. For instance, a full-time worker in America earns about $14500, which is way below the minimum wage required to strike the poverty line for the household. According to Kosters (2005), the minimum wage required to beat inflation stands at $23, 550. The increase in minimum wage proportionately to the inflation level will go a long way to lift several households out of poverty, consequently leading to fewer social problems and costs associated with poverty.

Moreover, research by the Economic Policy Institute points out that increasing the minimum wage will ensure that more jobs are created and additional output is realized in the economy. This is because the increase in wage results in motivation, hence an increase in productivity. With the increase in productivity in the economy, the growth of the economy is inevitable.

It is important to note that increasing the wage bill for employees increases their purchasing power. This means that demand for goods and services increases in the economy. Such a move implies that it results in the extra pay being injected back into the economy through the increased purchasing power of the worker. For this reason, spending stimulates growth in the economy (Card, 2008). Research shows that for every $1 added to the minimum wage, the worker will spend on average an additional $2800 in the subsequent year (Card, 2008).

The other notable contribution of an increase in the minimum wage is that it results in reduced turnover. Motivation is key to retaining the workforce and there is no better way to motivate workers than by increasing their pay. For instance, a case study conducted at the San Francisco Airport in 2003 unearthed that an increase in wage bills from $6.45 to 10 dollars for security workers resulted in a significant reduction in turnover from 95% to just 19% (Flinn, 2010). This was coupled with an increased level of performance by up to 35%. Consequently, the increased minimum wage is considered to be a cost-saving to the business as it facilitates avoidance of the high costs associated with the creation of turnover.
Finally, an increase in minimum wage results in more revenue for the government through income tax. The income tax is always proportional to income, hence increase in minimum wage means that people will be taxed more and the government is in a position to acquire the much-needed revenues to finance various social programs in the economy.


Opponents
The opponents of the increase in minimum wage front have various reasons for their opposition to the arrangement. Top on the list is that increase in minimum wage results in to increase in the cost of doing business, which in turn results in reduced levels of profits for businesses. The primary goal of any business unit is to make a profit and the best way to achieve this goal is through maximizing revenue and minimizing costs (Flinn, 2010). Owners of businesses, in a bid to cut costs and increase profitability, always target low labor costs. By raising the minimum wage, most businesses become less profitable.

This move is also likely to scare away potential investors because most local and domestic investors can have a feeling that the cost of doing business in America is high. As a result, they are likely to shift to other economies with friendly wage policies. The other negative aspect of increasing the minimum wage proportionately with the inflation level is that it could result in layoffs by the companies in a bid to accommodate the new-hiked minimum wage (Flinn, 2010). This includes the government’s objective of increasing the levels of employment in the economy, which is already grappling with high unemployment levels.

Conclusion
Increasing the minimum wage is good for the economy in many ways. It can solve the social problem of poverty because it can be able to lift the majority of Americans out of poverty. Moreover, an increased minimum wage automatically results in improved economic performance, due to increased demand for goods and services as a result of improved purchasing power of the workers. Finally, increased minimum wage saves the government the social costs needed to deal with the social problem of poverty and its related consequences like crime. Surely, the benefits of increasing minimum wages supersede the disadvantages and, hence, this move should be advocated. Read More