Economic Benefits of Increasing Minimum Wage - Research Paper Example

Economic Benefits of Increasing the Minimum Wage in New Jersey In a recent debate, the Republicans and Democrats disagreed over proposal to increase the minimum wage in New Jersey to $8.50 from $7.25 an hour (Kosters 114). In addition, the Republicans sought to provide a system that evaluates the annual cost of living and adjust the minimum wage accordingly. On 19th November 2012, the Budget Committee allowed the bill to advance to the next stage by a 7-6 vote margin. However, the bill awaits approval by the Senate to become a law. The bill is designed to increase the minimum wage rate beginning March 1 and implement the cost of living allowances by Jan 1, 2014. Several economists have raised questions about its effectiveness in stimulating the economy. Since early 1990s, most economists and political analysts suggested that increasing the minimum wage destroys or reduces job opportunities. They all had a notion that if the cost of labor is artificially fixed, then the economy will experience a low demand for cheap human resources since the supply will be much higher. This is in reference to the classic law of economics that has lost its relevance in accounting for market forces affecting a modern economy such as that of New Jersey. The relationship between minimum wage and the rate of employment is not determined by the demand and supply forces of the market, but the market power of the employers. Increasing the minimum wage in New Jersey will spur New Jersey’s economy since low-income earners will have more money to spend to meet their basic needs hence boosting the local businesses in this region. Discussion In 1992, the senate increased the minimum wage in New Jersey by 20% to level at $5.05. However, no changes were implemented in Pennsylvania as the minimum wage rate remained at $4.25 (Card and Krueger 45). A closer look at what happened in both States reveals an unusual trend in the rate of job employment. Contrary to the natural law of economics, food restaurants in New Jersey did not dismiss workers to maintain their nominal operational costs of running their businesses. Although the cost of hiring unskilled labor became much more expensive, the rate of employment in New Jersey increased than in Pennsylvania. Even though several economists believe this is an isolated case, it proves that increasing the minimum wage does not necessarily lead to decrease in the rate of employment. A recent study by Boeri and Van carried out in May 2012 in New Jersey is an evidence that sharply contradicts the conventional conception that increasing the minimum wage reduces the rate of employment of unskilled workers (Boeri and Van 85). The reason for this odd behavior is because of increased income caused a direct increase in how much low-income earners were willing to spend. However, Northwood conducted a similar case study in the San Francisco bay area and was surprised by the employment rates that he recorded in this area. An increase in the minimum wage did not result in any job losses in this area. Businesses in this area experienced increased sales since the employees had more money to spend enabling business owners to afford the high cost of recruiting unskilled labor (Northwood 158). In concise, low paid workers were getting more money, thus they were able to consume more hence boosting the economic activity in New Jersey. Payroll reports obtained from Wendy’s Burger King, Roy Rogers franchises, KFC Franchises reveals this unusual trend employment of unskilled labor after the minimum wage was raised in New Jersey. The recent global recession led to an increase in the cost of living forcing low-income earners to trim their spending habits. Raising the minimum wage in New Jersey would help workers recover from the effects of the recession. This is because they would spend their new earnings almost immediately, impacting the GDP positively (Kosters 263). As highlighted above, the benefits of increasing the minimum wage in New Jersey will be boosting the earnings of the low-paid workers in this State. It is estimated that increasing the minimum wage to $8.50 for example, would promote direct and indirect gains of $39.7 billion to the affected workers who would in turn spend their extra earnings, boosting the economy. Increased customer spending is critical for the recovery of the economy that was affected by the recent recession. Increased customer spending promotes the recruitment of adequate human resources to serve the rising demand for products and services. In essence, it will act like a positive stimulus to an economy that has been experiencing slow growth. There exists a cycle of dependence between an increase in the rate of minimum wages and the decrease in corporate profits to increase compensation to low-wage workers. This means that there is a shift in profits to meet the needs of low-wage workers (Card and Krueger 123). However, this leads to increased sales turnover for the business as they are likely to spend their extra earnings to meet their basic needs that cannot be substituted. In concise, increasing the minimum wage to $8.50 will stimulate the demand for consumer goods and services forcing employers to recruit new staff to serve the rising demand. This means that the effects raising the minimum wage rates will benefit businesses and the economy of this State indirectly. There exists a direct relationship between increased economic activity and the rate of job creation. In essence, job creation is dependent on the overall growth rate of the economy. Increased business activity forces business owners to employ more staff to meet the needs of the growing clientele (Boeri and Van 235). Profit gained is used to remunerate services offered by low-wage workers hired on contract basis. The State of New Jersey should embrace this change in business economics to stimulate the economic growth of this region in addition to ensuring better pay for low-wage workers that play a very vital role in supporting local businesses. At first, businesses experience a reduction in the profit margin as they have to hire before they can reap the benefits of increasing the minimum wages. Conclusion In summary, businesses in this area will experience increased sales since the employees will have more money to spend enabling business owners to afford the high cost of recruiting unskilled labor. In concise, low paid workers will be getting more pay for their efforts, thus they will be able to consume more hence boosting the economic activity in New Jersey. They would spend their new earnings almost immediately impacting the GDP positively. In concise, increased customer spending is critical for the recovery of the economy that was affected by the recent recession. It promotes the recruitment of adequate human resources to serve the rising demand for products and services. Works Cited Boeri, Tito and Jan van. The Economics of Imperfect Labor Markets. Minnesota: Princeton University Press, 2012. Print. Card, David Edward and Alan B. Krueger. Myth and Measurement: The New Economics of the Minimum Wage. Minnesota: Princeton University Press, 2011. Print. Kosters, Marvin H. The Effects of Minimum Wage on Employment. New Jersey: American Enterprise Institute, 2006. Print. Northwood, Joyce M. Three Empirical Studies of the Impact of the Minimum Wage on Immigrants. Michigan: ProQuest, 2008. Print. Read More