Effects of Minimum Wage Employment Dynamics - Example

Name: Professor: Course: Date: Minimum Wage Introduction Minimum wage refers to the lowest amount of money that employers in a certain jurisdiction can legally pay their employees. Similarly, it is the limit to which laborers are willing to sell their services for. Minimum wage is prevalent among low skilled laborers as more often than not, skilled workers fetch salaries far above the minimum wage. It has been a hot topic among policy makers and economists in the recent past as to the exact amount that should be set as the minimum wage, raising or even lowering it with the current minimum wage having been raised in 2009 to $7.25 per hour. Minimum wage in a country for example is dependent on a number of factors such as a country’s economic growth, demand and supply, cost of living, government regulations and the cost of training workers (Meer and West 22). Numerous debates on this topic have arisen with one side arguing that it is a major cause of unemployment, increases poverty, it’s detrimental to businesses and leads to increase in price of products and services. The other divide however argues that minimum wage is a great tool for curbing rising wage and income inequalities, reducing poverty and raising the standards of living. Recent research has shown conflicting evidence to both sides of the argument with the takeaway being it is essential to strike a balance and weigh the cost of potential loss of jobs due to higher minimum wages against the benefits of this increase on the workers (Neumark 1). Policy Problem Background Minimum wage in many countries is a regulatory policy fixed to prevent exploitation of workers. It is set up with the intention of reducing inequality in societies, improving people’s standards of living and encouraging people to take up jobs. However, as mentioned earlier, minimum wage policy making should be done with extreme care to prevent financial crisis and massive loss of employment. Additionally, economic factors are constantly changing and at some point the minimum wage needs to be lowered or raised to maintain this equilibrium. This is the fundamental problem that faces policy formulation of minimum wage laws. With all the expectations placed on the positive effects of minimum wage, Kosteas disputes that minimum wage in itself is not sufficient at alleviating poverty (720). He continues further to say that the effects of “disemployment” in fact produce a net increase in poverty. Subsequently, there is a reduction in the number of workers demanded as the quantity of either the individual workers is reduced or there is a reduction in the number of hours required of them (Kosteas 721). This hurts small businesses more than large ones and regularly leads to price inflation as businesses want to compensate by raising the prices of goods they sell. The effects of a high imbalanced minimum wage have an avalanche – like effect as economic conditions continue to plummet. Employers now are encouraged to replace workers who possess low skill with computers says Belvedere (14). This benefits the skilled personnel at the expense of the poorer and less productive employees. Minimum wage policy problem can then later lead to increase in crime among poor communities and can even result to the exclusion of certain groups i.e. ethnic groups from the labor force (Belvedere 16). Policy Solution Description In spite of all this, many people still support minimum wage despite strong evidence that it reduces unemployment among low skilled workers, the very group this policy is intended to help. This is so, as many people believe the benefit it confers outweigh its possible harms. Is there a better way to help workers from low income households? Indeed there is. Most economist believe that there are other mechanisms preferable to minimum wage such as Work Income Tax Benefit (WITB) or the Earned Income Tax Credit (EITC) (Murphy et.al 31). This programs are directed specifically to increase the income of poor workers. Programs such as these allow low income households reduce their liabilities through tax credit and subsidies from the government (Murphy et.al 40). Low Income households get to keep more of their earnings. The fundamental problem of these programs as Murphy explains had been they give rise to a “welfare wall”, taking away the incentive for them to work because they have very high marginal income taxes (33). The solution to this was achieved through structuring these program’s benefits to motivate worker to get more incomes and once these workers reach a certain income bracket, the government would no longer offer additional benefits (Murphy 34). Benefits and Costs Suffice to say, increasing minimum wage has its benefits when properly carried out. Minimum wages increases the standards of living for the poorest in the society. This is because with more money in pockets of low skilled laborers, they are now able to improve their living conditions. Additionally, it increases the incentives to take up jobs while simultaneously reduces the need for government welfare payments by income for the lowest paid in the society (Neumark 4). Circulation of money in the economy improves as workers spend more money they earned. High minimum wages also encourage training of worker so that they can get higher paying jobs ultimately resulting to a more skilled labor force. The workforce is also inclined to pursue money through legal means rather than crime or selling drugs. The cost of high minimum wages is definitely felt most by the government as they are the largest employer of workers in a country. The government is forced to increase the wages of hourly employees affecting its budget. The budget also gets influenced indirectly by an increase in minimum wage which leads to an increase in price of goods and services purchased by the government (Meer and West 24). It is therefore necessary to make further appropriations in the budget to care of this additional cost but as aforementioned, if minimum wages are correctly determined, the money circulates back into government in the form of tax. Unintended Consequences Potentially, one of the worst consequences of higher minimum wages is “disemployment” among low income workers with rippling effects experienced in the whole economy (Murphy et.al. 37). However, an unintended consequence of increased minimum wages is, some groups are more likely to be retrenched in the case of unemployment so that the business can accommodate a more expensive work force. It may happen consciously or subconsciously but men are more likely to get favored in the workforce compared to women. This creates an undesired consequence of sexism. Ethnic communities and race too may also be a line through which employment or in this case unemployment may occur. Moreover, economic difficulties may vary from one geographical location to another. The standard raising of minimum wage in disregard of geographical working locations is a flaw in this system as the minimum income required to sustain a city dweller facing higher cost of living should differ from rural residents. Implications for future policy The study from Murphy et.al. casts considerable doubt on the use of minimum wage to aid low income workers. Murphy et.al shows that there exists a difference between minimum wage earners and the working poor (37). In a certain survey done in Canada in 2012, the data shows only 12.5% of minimum wage workers were below the low income cut off bracket. At the same time 83.4% of those worker who fell short of this low income cut off were earning more than the minimum wage (Murphy et.al 37). This is evidence that minimum wage going into the future will not be effective for helping the working poor. There is need to take further inquiry into how the lives of low income households can be improved as it is not only an economic issue but also a moral one as well. Conclusion Meer and West conclude that a minimum wage has two effects on employment which are opposing (26). An increase in the marginal cost of an employee reduces demand for new workers while causing additional search effort from the unemployed potentially improving employee to employee match quality (Meer and West 26). Of course all this is dependent on the economic factors affecting minimum wage remaining at an equilibrium. Meer and West through theoretical and empirical reasons believe that the effects of minimum wage are more likely to lead to an increase in net job growth (26). I believe we have much better alternatives to the minimum wage such as the WITB and the EITC that have broad support politically and works in a smarter way than minimum wage. Unlike the usual welfare programs, this programs reduce disincentives from workers which occur when the government eliminates assistance at higher income levels (Murphy et.al 38). They remain a much sensible approach in funneling resources to the assistance of the poorer workers as compared to minimum wage. Works Cited Meer, Jonathan and West, Jeremy. Effects of Minimum Wage Employment Dynamics. Journal of Human resources. Texas. 20-26. Neumark, David. The Effects of Minimum Wage on Employment. ‘FRBSF Economic Letter’. (2015). 1-5. Kosteas, Vasilios D. Minimum wage. ‘Encyclopedia of world poverty’. Thousand Oaks, California. (2006) 719-721. Belvedere, Mathew. “Worker pay vs automation tipping point may be coming”. (2016) 14-17. Murphy, Robert P., Lammam, Charles and Macintyre, Hugh. Raising the Minimum Wage; Misguided Policy Unintended Consequences. (2016). 31-38. Read More