The Employment Effects of the Minimum Wage - Essay Example

The Employment Effects of the Minimum Wage Introduction A federal minimum wage was initially implemented in the U.S. with the enactment of the 1938 Fair Labor Standards Act (Katz et al. 487). Even though, the proportion of workers covered by the law was formerly less than 50%, coverage has grown to now integrate over 90% of all American workers (Katz et al. 487). Since its passing, there have been extensive debates concerning the advantages of minimum wage and whether or not it should be increased, as well as the widespread effort to calculate their economic implications (Katz et al. 487). Raising the minimum wage would have two key implications on low-wage employees. A majority of them would, for sure, get higher income, which would raise their family’s income, plus a number of those households would see their revenue go above the national poverty threshold (CBO 5). However, some employments for low-wage employees would likely be terminated, the income of a majority of employees who became jobless would also drop considerably, plus the share of low-wage employees who were working would most likely fall slightly (Katz et al. 487). The issue of how a minimum wage impacts employment is still one of the most broadly researched, as well as most controversial subjects, in labor economics (CBO 5). During the last recession, the U.S. employment rate for low-skilled or younger workers, who are more probably to be paid wages close to or at the minimum, deteriorated excessively, and after the recession, the joblessness gap derived from education remains large (CBO 5). This paper will discuss some of the main arguments raised above, and in particular whether imposing a minimum wage above the market clearing equilibrium wage will reduce employment and contribute to increased unemployment particularly among young and relatively unskilled workers and whether there is any evidence of a significant employment-reducing impact of the minimum wage on low-wage workers. Some critics believe that, in some cases, the increase in the minimum wage might even have caused an increase in employment. Options in Increase Minimum Wage Lawmakers have proposed a number of options for raising the federal/national minimum wage, including some that would raise it to $10.10 per hour and then index it for inflation (CBO 8). The Congressional Budget Office (CBO) has evaluated the effects of such a decision and the effects of a slightly smaller increase to $9.00 per hour and would connect future increases to inflation (Katz et al. 487). The alternatives that CBO assessed would not alter other provisions of the FLSA, such as the one, which pertains to wage for young employees during their first three months of employment (CBO 8). $10.10 Option CBO evaluated the alternative, which would raise the federal minimum wage/income to $8.20 from $7.25 per hour on 1st July, 2014, to $9:15 in 2015 and to $10:10 in 2016 (Katz et al. 489). The raise in the minimum wage till 2016 would be roughly 40%. Also, this option would raise the minimum income for tipped workers from $2.13 to $4.90 per hour (CBO 9). Then, beginning in 2017, the minimum cash wage for tipped employees would go up by $95 cents every year till is attained 70% of the minimum wage (Katz et al. 489). $9.00 Option Also, CBO assessed a smaller change, which would raise the national minimum wage to $8.10 from $7.25 per hour on 1st July, 2015, and then to $9.00 on 1st July, 2016. The minimum wage for tipped employees raises when the minimum wage raises and also by a comparable percentage (CBO 9). The minimum wage raise would commence one year later than it would with regards to the $10.00 option (Katz et al. 489). This $9.00 alternative is more similar compared to the $10.10 alternative to minimum-wage raises studied in the economics literature in many respects, the portion of the labor force, which it would affect, the increase size and the truth that its actual value would be eroded in due course (CBO 10). Affects of This Increases Affect Family Income and Employment Generally, raising the minimum wage most likely cuts employment for a lot of low-wage employees. However, at the same time, they raise family income for a majority of low-wage employees. Employment A lot of critics believe that raising the minimum wage decreases employment in two ways. First, increased wages raise the cost to organizations (Card and Krueger 1398). Therefore, the organizations pass the increased cost on to consumers in the form of increased prices. These increased prices then cause the consumers to buy much fewer products (CBO 10). The organizations, therefore, produce much fewer products, which leads them to hire fewer employers. This is referred to as the scale effect, plus it decreases employment among both higher-wage employees and low-wage employees (Card and Krueger 1398). Secondly, raising the minimum-wage increases the cost of low-wage employees in relation to other inputs, which organizations use to come up with a finished product, such as technology, machines, as well as more prolific higher-wage employees (Neumark and Wascher 20). A number of organizations respond through decreasing their use of low-wage employees and moving towards other constructive inputs (CBO 10). This is referred to as substitution effect as it cuts employment among low-wage employees, but raises it among higher-wage employees (Card and Krueger 1398). However, conventional financial analysis might not apply in certain circumstances (Neumark and Wascher 20). For instance, when an organization is recruiting more personnel and wants to increase the income for their current labor force, brining in new workers not only those new employees’ income, but the additional income paid to retain the other employees, as well (CBO 10). Under such circumstances that arise more than often when searching for a new job is costly and time wasting for employees, raising the minimum wage implies that organizations have to pay the current labor force more, depending on whether a new employee was recruited (Schmitt and Rosnick 56). Therefore, it decreases the extra cost of recruiting a new worker creating an increased employment scenario (CBO 10). There is a broad range of presentations among financial analysts concerning the advantages of the conventional studies, as well as of this alternative (Neumark and Wascher 20). The low-wage employees whose incomes are impacted by raises in the minimum wage embrace not only those employees who would otherwise have received less compared to the minimum, but in some cases, employees who would have received slightly above the minimum, as well (Card and Krueger 1399). Following a minimum-wage rise, some organizations try to safeguard differentials in pay, for instance those that existed long ago, so that managers continue to earn fairly more compared to the employees that they supervise (CBO 10). This is done through raising the income of individuals who earlier earned fairly more than the fresh minimum wage (Neumark and Wascher 21). Furthermore, some wages decided through collective bargaining agreements are restricted to the national minimum wage, and; therefore, could rise (Card and Krueger 1399). Thus, raising the minimum wage makes some employer who would otherwise have received slightly higher than the fresh minimum wage to become unemployed for the a number of reasons, which lower-wage employees do (Neumark and Wascher 21). Some firms, at the same time, recruit more of those employees as substitutes for the employees whose incomes were needed to be raised (CBO 10). The shift in employment of low-wage employees provoked by the raise in minimum-wage differs considerably from organization to organization (Neumark and Wascher 21). Employment decreases more at organizations whose clients are extremely sensitive to increases in price because demands for their goods reduce more with increases in prices. Therefore, such organizations cut production more compared to other organizations do (Card and Krueger 1399). Also, employment decreases more at organizations, which can willingly substitute other fairly less significant inputs for low-wage employees and at organizations where low-wage employee make up a large portion of input expenses (CBO 10). Nevertheless, when low-wage employees have slightly fewer employment options overall, employment can decrease at organizations, which counteract some of the risen costs with enhanced productivity from workers’ working much harder to maintain their better-paying works and with the reduced cost of filling vacant positions, which are caused by higher wages’ drawing more job applicants and decreasing turnover (Card and Krueger 1399). Some organizations, mainly those that do not include many low-wage employees, but that rival with organizations that do, may see demand for their products rise as their rivals’ costs increase (CBO 11). Therefore, such organizations are more inclined to recruit more low-wage employees, as a result. The shift in employment of low-wage employees differs in due course, as well (Schmitt and Rosnick 57). Initially, when the minimum wage goes up, some organizations recruit slightly fewer low-wage employees, whereas other organizations do not. The decreased employment is focused on industries and businesses where slightly higher prices lead to larger drops in demand (CBO 11). However, over a prolonged time frame, more organizations substitute low-wage employees with inputs, which are fairly less costly like employing more productive higher-wage employees (Neumark and Wascher 21). Therefore, the percentage drop in employment of low-wage employees is mainly higher in the long run according to CBO’s assessment. Nevertheless, the overall drop in employment may be much smaller in the long run (CBO 11). This is because the total relies not just on the percentage drop in employment of low-wage employees, but on the amount of such workers, as well, which could decrease in due course if wage rise for low-wage employees left out any rise in the minimum wage, and everything else being equal (CBO 11). Firms may react to the rise in the minimum wage in many ways instead of raising prices or substituting less significant inputs for low-wage employees (Card and Krueger 1401). For instance, they may partially counteract a minimum-wage raise through reducing other expenses such as workers’ fringe benefits (pensions or health insurance), as well as job perks (free meals). Therefore, a slightly higher minimum wage may raise total compensation that also comprises of perks and benefits less than it raised cash wages only (CBO 11). That would grant organizations a smaller enticement to cut the employment of low-wage employees (Neumark and Wascher 21). Nevertheless, such benefit cuts would most likely be modest, in part since low-wage employees mainly get much fewer benefits with regards to health insurance or pensions (Katz et al. 494). Tax rules also specify those organizations that cut low-wage employees’ nonwage advantages can face hostile tax treatment for higher-wage employees’ nonwage advantages (CBO 11). In addition, organizations can partially counterbalance higher wages for low-wage employees through decreasing both informal coaching and mentoring or formal training. The proof on how much organizations reduce training, benefits, or other costs is not clear (Katz et al. 494). A minimum wage raise also shortly impacts the employment of low-wage employees through shifts in the economy-wide demand for products (CBO 12). A slightly higher minimum wage takes income from higher-wage business owners and consumers to low-wage employees (Schmitt and Rosnick 58). Since those low-wage workers are more inclined at spending a bigger fraction of their income, some organizations see higher demand for their products, boosting the employment of low-wage employees and higher-wage worker, as well (Card and Krueger 1401). That impact is slightly larger when the financial system is weaker, and it is bigger in regions of the U.S. where the economy is slightly weaker (CBO 12). Low-wage employees are not the only people whose employment can be impacted by a minimum-wage raise; the recruitment of higher-wage employees can be influenced, as well, in a number of ways (Katz et al. 494). Organizations, which cut back on production, are more inclined to reducing the portion of both low-wage employees and higher-wage employees (CBO 12). However, once a minimum-wage raise makes higher-wage employees fairly less expensive, organizations, at times, recruit more of them to substitute a larger portion of less productive or low-wage employees (Card and Krueger 1402). Another factor influencing higher-wage employees is the rise in the economy-wide demand for products (CBO 12). All in all, a high number of researches tend to support to fact that increasing the minimum wage would lead to fewer opportunities of employment. Family Income For a majority of households with low-wage employees, a higher minimum wage will increase their income due to the rise in earnings, which many of those employees (including the one whose incomes were somewhat above the fresh minimum) receive (CBO 12). However, also a much smaller portion of low-wage employees become jobless and thus endure a drop in earnings due to the raised minimum wage (Card and Krueger 1402). For households with low-wage employees, the impact of a raised minimum wage relies on how many such employees are in the family, whether those employees become unemployed (and, if so, the unemployment period), and whether or not there are other shifts in household income (CBO 12). For example, the decline in wage from losing an occupation can be counterbalanced by raising the non-labor wage, such as unemployment recompense, or raising works of other members of the family (Card and Krueger 1402). Family income for business owners drops to the level that organizations’ profits decrease (CBO 12). Also, actual family income for a majority of people falls a bit since the rise in prices of products reduces households’ purchasing power (Katz et al. 494). The implications on total federal income of a raise in the minimum wage vary in the short and in the long term (Katz et al. 494). In the long term, the vital determinant of the country’s income and output is the quality and size of the labor force, the supply of productive capital like technology and factories, and the competence through which capital and workers are utilized to produce services and goods (Card and Krueger 1403). Increasing the minimum wage mostly like decreases employment (CBO 12). In the long term also, decrease in the labor force lowers the country’s income and output a little, which implies that the wage losses of some employees are somewhat larger compared to the wage gains of other employees (CBO 12). In the short term, on the other hand, the country’s income and output can diverge from the amounts, which would normally result from a given capital stock, labor force, and productivity in reaction to shifts in the economy-wide demand for products (Card and Krueger 1403). Raising the minimum wage increases demand since the households that undergo increases in wages are more inclined to raising their consumption more than the households that experience drops in wages tend to decrease their consumption (CBO 12). Finally, in the short term, raise in demand increases the country’s income and output slightly, which implies that the wage losses of some individuals are slightly lower than the wage gains of other individuals (Katz et al. 494). Conclusion A federal minimum wage was initially implemented in the U.S. with the enactment of the 1938 Fair Labor Standards Act. Since its passing, there have been extensive debates concerning the advantages of minimum wage and whether or not it should be increased, as well as the widespread effort to calculate their economic implications. Raising the minimum wage would have two key implications on low-wage employees. A majority of them would, for sure, get higher income, which would raise their family’s income, plus a number of those households would see their revenue go above the national poverty threshold. However, some employments for low-wage employees would likely be terminated, the income of a majority of employees who became jobless would also drop considerably, plus the share of low-wage employees who were working would most likely fall slightly. This paper has discussed some of the main arguments raised above such as whether imposing a minimum wage above the market clearing equilibrium wage will reduce employment and contribute to increased unemployment particularly among young and relatively unskilled workers and whether, in some cases, the increase in the minimum wage might lead to increase in employment. The result of this paper should be highly considered because the labor force of a country forms the backbone of the nation. Therefore, if the labor force of a country is affected, then it affects the entire nation. After the 2009 recent recession, joblessness remains excessively high for less inexperienced and educated workers. In the long term, this group faces considerably longer periods of delays in hiring or joblessness, thus bearing the effect from minimum wages. This happening is mainly significant provided the proof that minimum wage jobs normally result in fairly rapid shifts to higher-paying occupations. Works Cited Card, David and Krueger, Alan B. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply,” American Economic Review 90.3 (2000): 1397-1420. Web. Congressional Budget Office. (CBO). The Effects of a Minimum-Wage Increase on Employment and Family Income. N.p, 2014. Web. Katz, Lawrence F., Card, David and Krueger, Alan B. “Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws: Comment,” Industrial and Labor Relations Review 47.2 (1994): 487-496. Web. Neumark, David and Wascher, William L., “Minimum Wages and Employment,” Foundations and Trends in Microeconomics 3.1-2 (2007): 1-155. Web. Schmitt, John and Rosnick, David. The Wage and Employment Impact of Minimum‐Wage Laws in Three Cities. New York: Center for Economic and Policy Research, 2011. Print. Read More