Economic Growth in the Short Run and Over the Long Term - Essay Example

The recent stimulus package by the president to increase the minimum wage from $7.25 an hour to $9 will help the struggling families afford an extra commodity in the food basket. Increases in wage for the lower earners help them afford extra things that they used to do without before their pay rise. The aim of this stimulus package is to boost the economic growth now and in the future. The American economy has not gained it position since it was hit by the 2007-2008 financial crises. People lost their jobs and investors lost confidence in the economy. This had an adverse effect of that took the economy into recession. Though the Obama administration offered short term measures by rolling out financial support to the affected banks, the measure was short term and only served to prevent further effect of the crisis in the economy. The recent stimulus package is similar to what the Obama administration did to the financial institution, but this time it is aimed at increasing the minimum wage to the majority of Americans in the lower job groups. The effect of an increase in the minimum wage is coercive to investors and business owners because it will cut on their profits. Moreover, increased wages of workers will increase the cost of running business in the short run (Koopman). High cost of running business may render the inefficient business to close or lender a decrease in the work force to minimise on the high costs of wages. Therefore, in the short run, an increase in the minimum wage increases the cost of production which has the ultimate effect of lying off of worker. Increasing the minimum wage affects the freedom of a free market economy. Economic decisions are best solved by the interaction of demand and supply in the market for labour, but not dictate from Washington. The effect of such a move result to adverse distribution of labour in the sectors of the economy. People will hesitate to work on business because of fear of being laid off when cost escalates in time of economic difficulties. This affects the labour market in the short run as well as in the long run. Moreover, government increase the minimum wage when the economic return of capital is minimal results to increased prices of goods and services. This constrains the economy in the short run and affects inflation in the future. In the early 1990s, the rise of the minimum wage in New Jersey had a different change of event compared to the neighbouring states of Pennsylvania. Within a period of one year, the unemployed increased to a higher rate than it was before compared to Pennsylvania which had no much changed in its unemployment data for the same period. According to The Wall Street Journal, raising minimum wage has an adverse effect on teenager seeking employment. Moreover, not only do young people lack employment, but also the less experienced and unskilled suffers the same fate of lack of opportunities as high wages attract experienced and skilled work force (The Wall Street Journal). According to Professor Reich, raising minimum wage does not have lead to low paying jobs in the short run and the long run (Maclay). . He says that according to economic growth of the 17 states he observed in 2005, the increased minimum wage above the federal level has no significant effect on people on the payroll (Maclay). According to Reich, increasing minimum wage stimulate the economy, but it is received with a lot of fear that a tipping point has already been reached. Reich and his co-author Arindrajit Dude says that the previous report that concluded that increasing minimum wage result to job losses are flawed. According to Reich, increasing the minimum wage has no negative effect on employment both in the short run and future (Maclay). Therefore, it is concise to argue that the effect increased minimum wage by Obama administration cautions the living standard of the affected employees. It is also worthy to note that the school of thought that argue for decreased job opportunity when minimum wages is increased relied on flawed analysis according to Reich. In the period February 2014 to February 2015, the economic conditions would be better with decreased level of inequality. Over the long term, increasing the minimum wage for lower income earners helps them to find better paying jobs. The unskilled work force gets training and gain new skills for better and reliable jobs. According to the University of Miami and Florida, low income earner has been shown to work better at minimum wage and get pay rise within the first year of working. Therefore, increasing the minimum wage would boost morale and help new jobs holders to work efficiently without seeking other part time jobs (Kersey). Exposure of high minimum wage may have an adverse effect on young people in their early years after they have been employed. It has been found that early exposure to high wages deter people from seeking further studies to increase their skills for the future prime job. Therefore, given the shortcoming of minimum wage in the short run it is argued that the labour market would lack experienced and skilled personnel’s in the long run (Neumark and Nizalova 1). However, if the increment in the minimum wage is large enough, it is then possible for an increase in minimum wage lead to increased learning for workers to suite the highly demand for the employers. In conventional economics minimum wage is supposed be higher than the rate of inflation. Therefore, the current announcement for an increase in the minimum wage is a continuous adjustment since 1968 when it was $1.40 per hour. Since then it has been raised by subsequent government to the current level of $ 9 an hour. Therefore, an old school of thought argue that minimum wage increase inflation in the long run. Increase in the minimum wage cause fear among business enterprises of minimal returns from their investments. This effect is real in the short run as well as in the long run. The fear that increased wages might result to produce passing over the burden to consumers is real today as was in the past years. However, the impact of raising minimum wage on the price level is minimal to impact the increase in inflation. There are other avenues that businesses can address the issue of increased costs other than passing the burden to consumers. For example, employers may motivate their work force to increase productivity and thus meet the revenue required to pay higher minimum wage. Nevertheless, even if the employer would pass the cost incurred due to increase minimum wage the effect would not affect the rate overall prices. Past research has shown that a 10% increase in the minimum wage result to o.1 increase in the overall prices when the entire burden is borne by the consumers. However, even a 10% is envisioned for the future because the current economic status cannot support such an increase, but it explains that the minimum wages do not increase inflation in the long run. Therefore, the Obama measure has to do with economic growth in the short run and over long term (Cooper and Hall). Over the past years, the wages of the American workers have diminished compared to the living standard of the majority in the country. This has necessitated a cry for higher wages by employees to enable them live a decent live and afford to own a home. The move by the Obama government, therefore, aims to address the income inequality by adjusting the minimum wage in the long run. The growing income inequality can partly be solved by increasing the salary of the most affected thus enabling them to have increased disposable income and savings (Cooper and Hall). Moreover, increased minimum wage has an effect of increasing the values of GDP and employment over a period of more than one year. The president argued that increasing minimum wage would elevate the parent under the federal poverty bench line and thus his government was prudent to increase the hourly wage of the less paid workers in the country. However, he noted that this only serve to those on the payroll, but supported his idea because in the long run more jobs would be created for the unemployed as the economic conditions of the countries improves. Increasing minimum wages ensures that families have increases income that before, and this would enable them take their children to colleges to secure a brighter future (Cooper and Hall). Raising minimum wage also create employment in the long run. It functions just like the insurance for unemployment and tax break that allow unemployed to seek a job without difficulties of lack of food, health insurance and affordable housing. Minimum wage increases the spending power in the economy more than any other increases in the upper class (Cooper and Hall). Economists argue those low paid workers are more likely to spend an extra increment in their wage than higher income groups. In conclusion, stimulus packages are essential in promoting the economic growth in the short run and over the long term. It is the surest way of helping a struggling economy out of recession and unto surplus production. Work Cited Cooper, David & Hall, Doug. Raising the federal minimum wage to $10.10 would give working families, and the overall economy, a much-needed boost. Web. Epi.org. 13 Mar. 2013. Web. 25 Mar. 2014. < http://www.epi.org/publication/bp357-federal-minimum-wage-increase/>. Kersey, Paul. The Economic Effects of the Minimum Wage. Web. Heritage.org. 3rd May. 2004. Web. 25 Mar. 2014. < http://www.heritage.org/research/testimony/the-economic-effects-of-the-minimum-wage>. Koopman, Roger. The Minimum Wage: Good Intentions, Bad Results. Web. Fee.org. 1 Mar. 1988. Web. 25. Mar. 2014. < http://www.fee.org/the_freeman/detail/the-minimum-wage-good-intentions-bad-results>. Maclay, Kathleen. Minimum wage hikes don’t eliminate jobs. Web. Berkeley.edu. 1 Dec. 2010. Web. 24 Mar. 2014. < http://newscenter.berkeley.edu/2010/12/01/minimumwagejobs/>. Neumark, David & Nizalova, Olena. Minimum Wage Effects in the Longer Run. Wed. Nber.org. Aug. 2004. < http://www.nber.org/papers/w10656.pdf?new_window=1>. Wall Street Journal. The Lost Wages of Youth Raising the minimum wage has put teens out of work. Web. Wsj.com. 5 Mar. 2010. Web. 25 Mar. 2014. < http://online.wsj.com/news/articles/SB10001424052748704761004575096150953378366?mod=rss_opinion_main&mg=reno64-wsj&url=http%3A%2F%2Fonline.wsj.com%2Farticle%2FSB10001424052748704761004575096150953378366.html%3Fmod%3Drss_opinion_main>. Read More