Minimum Wage: Influence on the United States Unemployment Rate - Research Paper Example

Name: Course: Institution: Tutor: Date: Minimum Wage: Influence on the United States’Unemployment Rate Introduction Minimum wage is the minimum amount of compensation an employee must receive for performing labor. Minimum wage controlis established by contract or legislation by government. At the beginning of twentieth century, the minimum wage law is first formulated in New Zealand and Australian. At present, more than eighty percentage countries in this world use through the establishment of the minimum wage law to provide the rights of employee (Jackson, 2007). Unemployment rate is an aspect that affects any existing economy in the society. It refers to the total population of the civilians who are not employed but are tirelessly looking for jobs. All eyes are watching the statistics of this (unemployment rate) because when it rises, it weakens the economy. A number of factors influence the rate of unemployment, but one key influence which is closely observed is the minimum wage rate. Minimum wage rate therefore, refers to the lowest compensation (monthly, daily or hourly) that employees are paid legally by their employers. It can also be viewed from the perspective of the exchange of labor with the ‘lowest wage’ an employer can offer.Variation in the minimum wage has significant influence on both employment and unemployment rate. A higher rate of minimum wage reduces employment, other than raising the rate of unemployment. Some economists believe that employees are sacked from work when there is an increase in minimum wage and others say that available employment opportunities might have phase out. Activities undertaken by workers are then switched to machinery. An example of this are the shoe shine stands which were once common in the streets replaced by a machine with a rotating brush shining people’s shoes. Thus, some jobs are more profitable at a lower wage and less profitable at a higher wage. From the last year’s October figures by The Bureau of Labor Statistics, the stock market increased because of the expected rise in interest rates. Interestingly, employment numbers increased. In September the same year, more than one hundred thousand people got jobs. Would this be related to the variation in the minimum wage? What on earth effect of minimum wage control system will be on unemployment rate? What should the minimum wage standard be and how to set it? Theory and Literature Review: In 1946, George Stigler studies the minimum wage control effect on employment. He proposed the effect of unemployment model in “The Economics of Minimum Wage Legislation” (Stigler, 1946). He argues that the minimum wage control system will increase labor costs, but whether it will harm employment is depend on the labor market, competitive or monopoly. In the complete competitive labor market, if the minimum wage is lower than market equilibrium wage level, then the minimum wage control would lose its meaning; if the minimum wage (Wmin) is higher than market equilibrium wage level (W*), then the minimum wage control would increase labor supply and decrease labor demand, there will be a deadweight lost (ABC), thus increase unemployment. If the government adopts the expansion fiscal policy to stimulate economic growth and mitigate unemployment tension, then the price level increases would decrease actual minimum wage, and temporarily increase employment rate. When price level increases, the actual minimum wage decreases to some extent, the government has to increase the minimum wage, thus leading to a vicious cycle. GRAPH 1: Many economists further studied on minimum wage control after George Stigler. There are two general opinions: the first one is the same with Stigler’s, which is that they all think the minimum wage policy is an intervention to the labor market. The policy not only cannot decrease poverty, but also distorts the resource allocation, causing a negative influence of lower efficiency and higher unemployment. According to Brown’s (2005) argument: “increase the low-income workers wage is at the cost of lower employment”.Teulings (2003) proposed that the minimum wage control has a big influence on laborers who are in the bottom of society. He also explained the 1980's wage increase in America from the perspective of minimum control system. Neumark and Wascher (1999) analyzed 6 OECD countries from 1975 to 1997 by using time-series method. His conclusion is that the minimum wage increase would decrease the teenagers’ employment, but the negative effect of minimum wage control between countries is different. Another opinion is that the increase in minimum wage does not have much influence on business, even helps lower unemployment rate. Increase consumers’ purchasing power will enlarge part of the market demand, thus increase the employment for certain related labor market. Household labor force will also compensate for unemployment caused by minimum wage control to some extent. As the minimum wage increases, some households will decrease labor supply, and compensate for part of the unemployment performance. The effect of minimum wage control on employment rate depends on the above combined factors. Card and Krueger (1994, 1995) studies the minimum wage control on New Jersey and Pennsylvania fast-food industries employment effect, and concluded that increase minimum wage would not necessarily increase unemployment rate. Welch (1995), Neumark and Wascher (2000) later re-analyzed the data collected by Card and Krueger (1994), and get the similar conclusion. Andrew Jackson (2007) concluded the recent years' research analysis conclusion, and he argues that the minimum wage control does not have much negative influence on employment rate. However, Machin and Manning (1997) pointed out that due to America’s generally low minimum wage standard, the minimum wage control does not have much influence on America’s labor market, but the minimum wage control will have much bigger influence on places where the ratio of minimum wage and average wage is large, such as Europe and Australia. Hypothesis The study would seek to find theoretical support for the research hypothesis, which states that there is statistical significant correlation between minimum wage and the unemployment rate in the United States of America. States with low education levels have a slightly high rate of unemployment compared to those ones with a high education level. As the gap between the educated and uneducated narrows, the unemployment rate reduces and many opportunities for employment are created. In the States with extremely high minimum wage, the unemployment rate is relatively high. Thus as the minimum wage rises, the rate of unemployment also rise as a result. How minimum wage has influenced the USA’s unemployment rate The idea of minimum wage has been controversial among economists. Classical economics believe that the demand for labor increase as its price depreciates. Therefore, firms must evaluate the possibilities to generate profit from every employee hired. Hence, if the cost per worker is less, a firm should be in a position to hire more staff so as to make more profit. By creating a wage limit which is low, the law governing minimum wage prevent organizations from providing low paying jobs and increase unemployment(Frédéric, Isabelle and Thérèse 2010) Researchers suggest that a slight rise in the lowest wage (by ten percent) decreases “low skill employment” by three percent. On the other hand, the Keynesian’s perspective is totally different. Employers and employees set wages in their nominal terms done, (Kreickemeierand Douglas 2006). Thus, they cannot predict the ideal purchasing power of the wages. A simple supply – demand model elaborate the basic effect of minimum wage on unemployment and employment in a labor market. Employers reduce cost before and after the law of minimum wage. Such adjustments cover the employees’ skills and level of efforts(Donald 2008) Key: Em: employment demanded at Wm Wm: minimum wage set Sm: number of people willing to work Wo: initial wage Eo: initial employment D: demand S: supply From the above diagram the initial employment Eo is determined by demand and supply. When the minimal wage is brought in, employment drops to Em. Wm is the wage level demanded at Em. The proportion by which employment reduces is equal to the proportion by which the wage increase times demand elasticity. “If employment would otherwise increase, the reduction in employment predicted by the model may take the form of a lower rate of employment growth rather than an actual decline in the number employed. If the employment actually declines, it may take the form of not replacing workers who quit rather than discharging workers.” Says Muriel Converse (1981, p282). The model also determines excess supply of labor at a new minimal wage but it does not correspond to measures of unemployment which are official. Sm represents the sum of the people willing to offer their services at Wm. The remaining population which is not actively involved in search for jobs is not included in the total count of unemployment. When we combine the supply and demand curve for labor, it gives us an allowance to examine the impact of minimum wage. An assumption here is that there will be no change in the supply and demand curve when the minimum wage is raised. “If no minimum wage is in place, workers and employers will continue to adjust the quantity of labor supplied according to price until the quantity of labor demanded is equal to the quantity of labor supplied, reaching equilibrium price, where the supply and demand curves intersect.” There is this theory which states that when minimum wage is set on top of the equilibrium cost, workers will be willing to provide more labor than whatever is demanded by the employers thus, causing unemployment. Labor is in surplus here.Economics analysts state that where there is a price floor that is higher than the equilibrium wage, laws on minimum wage must cause unemployment. The reason behind this is that majority of civilians are willing to perform their duties at a higher wage whereas only a smaller fraction of available jobs offer higher wages. As a result, companies become more choosy and selective in deciding on who to employ hence those people with no skills are left out(Donald 1998). A slight increase in the minimum wage will only influence the labor market made up of the unskilled population. In a labor market full of skilled people, the equilibrium wage is extremely high for variation in minimum wage to influence employment. We assume that employees are ready to perform their duties for additional hours if they are paid a slightly higher wage. This relationship can be represented on a graph (as shown above). Thus, from the wage-employment supply- demand model, we can say that the cost of a firm is a function of wage. When the wage is high, employers will demand employees for fewer hours. As the rate of wage rises, firms find it hard to hire workers because it becomes more expensive for them. Some organizations hire employees for few hours in such circumstances. George Stigler argues in the monopsony case that minimum wage decreases employment. “Without a minimum wage, the monopolistic employer’s marginal cost of labor everywhere exceeds the supply price; labor is hired until marginal cost and demands are equal.” From this, an employer becomes the price taker because of the minimal wage. Hence the minimum wage increases between competitive wage and monopsony wage(Donald 1998) In the labor market, minimum wage is considered the price floor which is the wage rate. For a price to be effective, it must be set on top of the equilibrium price. This implies that the labor supply would be greater than the demand at the minimum wage. Thus, majority of employees would prefer working at the wage rate and businesses will be willing to hire at the same rate. The population of workers hired would be less compared to that of staff that is hired at the price equilibrium in the absence of the law on minimum wage. Potential employers will therefore, employ few people and others will be remain unemployed. Minimum wage laws have an influence on various groups of individuals. The law increases the production costs. It means that there is a decrease in supply of commodities, resulting to reduced quantities offered to consumers and a hike in the prices of the same commodities.“The minimum wage laws do not just affect the wages of workers who work for minimum wage(Mathias, Etienne 2009). If employers are forced to pay higher wages to their least productive and most inexperienced workers, they are also likely to raise the pay for more productive workers. This will allow them to provide an incentive to their workers to become more efficient. This also will mean higher production costs and the resulting decreases in supply. This will magnify the amount of the labor surplus, creating more unemployment(Mathias, and Etienne 2009).” Young businesses and upcoming companies are influenced mostly by the minimum wage laws. Such businesses are likely to depend on extremely low labor costs for them to survive. In such a society, there is no economic growth because of low supply caused by high input prices. Small organizations are the largest employers, or rather perfect source of jobs. Thus, it results to a high unemployment rate and a greater decrease in the final product. Many people think of business ideas but they do not materialize due to the costs of labor which are quite high(Mathias and Etienne 2009) Majority of people rely on employments paying minimum wage. These are the only available jobs for civilians in the rural areas. The laws on minimum wage may prevent poverty amongst the population surviving on the wages. Thus, minimum wage laws reduce welfare cost programs offered by the government. This is a representation of a shift in the cost to employers from taxpayers. Employers hire employees at very low wages. The level of unemployment and costs associated with the minimal wage depend on the elasticity of supply and demand. When demand for labor is lower than supply at the rate of wage of an efficient minimum wage, the gap between the two represents the amount by which the wage laws raise the unemployment(Peter and Alfred 2009). However, not all the amount is a representation of the population which have lost jobs because of minimum wage.“Only the amount by which the number of workers hired is below the free market equilibrium quantity, not the total below the labor supply curve, represents people who have lost jobs due to the minimum wage.  The rest of the difference between supply & demand, which would be the difference between the market equilibrium quantity and the labor supply quantity at the minimum wage, represents people who wouldn't have had jobs anyway(Hungerbühler and Lehmann 2008).” Research conducted by Time.com depicts that United States’ minimum wage was at twenty five percent (25%) per hour in the year 1938. Following a series of laws which were against careless firing of workers, based on race or gender, minimum wage moved to $1.60 per hour in the year 1968. Between the years 1981 to 1990, the minimum wage was at $ 3.35 per hour and remained at $5.15 for ten years (1997-2007). The laws on minimum wage were put in place to prohibit employers from paying substandard salaries to the full time low-earning employees. In the current years, the minimum wage is not just about taking care of the low-income earners, but it is all about equality and fairness for the quality of work in addition to the opportunities that jobs offer. Other than impacting on the employment and unemployment, the minimum wage has its own advantages which include: Reducing poverty because it raises the wages of the low-income earners. It improves the productivity because it offers high incentives to make employees become hard-working and add value on the output. Furthermore, employers have the opportunity to access incentives to invest and improve productivity because the cost towards the employer is quite expensive. Minimum wage gives employees the required amounts of income from the services they offer to enable them settle their bills and survive. Moreover, it prevents organizations from taking advantage of workers, mostly in economic hardship(Mathias and Etienne 2008) On the other hand, minimum wage has its shortcomings. It might make young businesses or non-profit firms to move out of the business. This is because these firms may find it hard to cover the cost of wage for their employees. Uniformity in the distribution of minimum wage is difficult because of the variation in the living standards and cost of living in different parts of the country. Minimum wage offer incentives for firms to shift their jobs abroad where the cost of labor is quite low and mechanize opportunities, or rather duties which would otherwise be performed by human beings. Besides, when the minimum wage is raised extremely high, it might result to high rate of unemployment and inflation on the cost of commodities. All these in one way or the other affects the rate of unemployment in the economy(Peter, Alfred 2009) The minimum wage has been decreasing drastically since the year 1979 to 2009 as shown in the figure below. Between the years 1979 to 1984 the percentage minimum wage rate was extremely high. It went down and rose again between 1989 and 1994. Thereafter, it dropped completely between the years 1999 to 2004. Conclusion In conclusion, several agencies have big emotional, ideological, financial and political investments in matters related to minimum wage. For instance, different groups that govern the minimum wage laws have devolved interest in proving that these laws do not cause unemployment. Moreover, employees are covered in unions which protect them using minimum wage laws. Sometimes it is hard to place a ridge between the influences of minimum wage from other factors affecting employment. People who support the minimum wage claims that it raises the living standards of those in poverty, motivates workers to become hard-working andencourages consumption by increasing money supply towards the direction of those people who earn little and spend every coin at the same time. Furthermore, it raises ethic of work for the workers who earn low incomes because employers require quality output from these employees who are hired expensively and motivate civilians to obtain employment other than looking for money through illegal means. Minimum wage also stimulates technological development and advancement. On the other hand, there is this group of individuals that is against the minimum wage laws. They believe that the laws hurt young businesses as compared to large ones. It goes further to decrease the number of workers and hours of work through reducing the employment opportunities. Minimum wage laws profit some of the employees at the expense of the poor one and unskilled and result in excluding other people from the workforce. Additionally, it is less efficient when it comes to reducing poverty and discourages education for the poor by hindering people to get in to the labor market(Peter and Alfred 2009). “If a higher minimum wage increases the wage rates of unskilled workers above the level that would be established by market forces, the quantity of unskilled workers employed will fall. The minimum wage will price the services of the least productive (and therefore lowest-wage) workers out of the market. The direct results of minimum wage legislation are clearly mixed. Some workers, most likely those previous wages were closest to the minimum, will enjoy higher wages(Mathias and Etienne 2008) This is known as the "ripple effect". The ripple effect shows that when you increase the minimum wage the wages of all others will consequently increase due the need for relativity.” Works Cited Brown, Charles. 2005. “Comment: Review Symposium–Myth and Measurement: The New Economics of the Minimum Wage by David Card and Alan B. Krueger.” Industrial and Labor Relations Review. 48(4): 487-528. Card, David and Alan B. Krueger. 1994. “Minimum wages and employment: A case study of the fast- food industry in New Jersey and Pennsylvania.” American Economic Review. 84(4): 772-793. Card, David and Alan B. Krueger. 1995. “Myth and Measurement: The New Economics of the Minimum Wage.” Princeton, NJ: Princeton University Press. Jackson, Andrew. 2007.“The Economics of the Minimum Wage.” Canadian Labour Congress Work Paper No. 17. Machin, Stephen and Alan Manning. 1997. “Minimum wages and economic out- comes in Europe.” European Economic Review. 41(3):733–742. Neumark David and William Wascher. 2000. “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment. “American Economic Review.90 (5): 1362–1396. Stigler, George J. 1946. “The Economics of Minimum Wage Legislation.”American Economic Review. 36(3): 358-365. Teulings, Coen N. 2003. “The contribution of minimum wages to increasing wage inequality.”The Economic Journal. 113(490):801-833. Welch, Finis. 1995. “Comment: Review Symposium–Myth and Measurement: The New Economics of the Minimum Wage by David Card and Alan B. Krueger.” Industrial and Labor Relations Review.48 (4): 842–849. Formby, J., Bishop, J., & Kim, H..(2010). The Redistributive Effects and Cost-Effectiveness of Increasing the Federal Minimum Wage.Public Finance Review, 38(5), 585. Retrieved April 18, 2012, from ABI/INFORM Global Frédéric, Gavrel. Isabelle, Lebon andThérèse,Rebière.Wages, selectivity, and vacancies: Evaluating the short-term and long-term impact of the minimum wage on unemploymentEconomic Modelling, Volume 27, Issue 5, September 2010, Pages 1274-1281 Pierre, Cahuc. Philippe, Michel. Minimum wage unemployment and growthEuropean Economic Review, Volume 40, Issue 7, August 1996, Pages 1463-1482 Udo, Kreickemeier and Douglas, Nelson.Fair wages, unemployment and technological change in a global economyJournal of International Economics, Volume 70, Issue 2, December 2006, Pages 451-469 Donald, R Davis. Technology, unemployment, and relative wages in a global economy  European Economic Review, Volume 42, Issue 9, 1 November 1998, Pages 1613-1633 Mathias, Hungerbühler. Etienne, Lehmann.On the optimality of a minimum wage: New insights from optimal tax theoryJournal of Public Economics, Volume 93, Issues 3–4, April 2009, Pages 464-481 Peter, Flaschel and Alfred, Greiner.Employment cycles and minimum wages. A macro view Structural Change and Economic Dynamics, Volume 20, Issue 4, December 2009, Pages 279-287. Read More