Analysis of the Impact of High Minimum Wage - Essay Example

Advantages and Disadvantages of a Higher Minimum Wage

Introduction

The minimum wage refers to a binding contract that specifies the minimum amount of remuneration that an individual can be paid for a specified activity over a set period (Stockhammer, 2013). Therefore, the minimum wage becomes a set standard that may be defined by law, statutes, or competent authority. Setting up a minimum wage thus protects workers from undue exploitation by employees by providing a basis for payment according to work done. Furthermore, the minimum wage also addresses poverty issues by ensuring that workers are paid enough to support their overall well-being and ultimately improve their living standards. Therefore, workers are entitled to adequate remuneration for specified work value to prevent discrimination and protect their interests. While a higher minimum wage may be perceived as the best-case scenario, it has benefits for both employers and employees but at the same time may cause problems for these parties.

Advantages of a higher minimum wage

Firstly, an increased minimum wage increases the amount of money that workers are paid to offer their services. In turn, this increases their spending power, thus enabling them to purchase goods and services required to sustain their daily lives. An increased purchasing power can spur economic growth, with more people able to afford to sustain themselves (Cengiz, Dube, Lindner, & Zipperer, 2019). A significant portion of the population across the globe are low-income earners, hence playing an essential role in the overall wellness of their countries' economies. Therefore, with increased minimum wages, a large number of workers can support their economies to perform better. Low earning workers also benefit from higher minimum wages since they can receive better remuneration for their services. Higher wages thus improve the economy of a country since more people can afford goods and services offered. Improving the wages of individuals earning a minimum wage thus has positive effects since a significant proportion of a number of some country’s population earn a minimum wage.

Apart from that, higher minimum wages improve employees' motivation since they are well rewarded following their job descriptions (Dam, 2019). Motivation plays a vital role in productivity hence, highly motivated employees are more likely to have increased productivity rates (Stockhammer, 2013). Financial gain is the leading factor that workers look at when assessing an employer hence, workers are likely to choose companies that pay higher wages. An adequately paid worker tends to have better mental and physical wellness, which contributes to their performance. Furthermore, better pay increases the retention rates, with more workers willing to stay at an organization. Higher wages increase the social and workplace comfortability of the employees, thus creating a sense of belonging, which further fosters motivation. Higher retention rates increase productivity since the company can retain their best performers, reducing the cost and time required to train new employees regularly. Therefore, higher minimum wages positively impact employee performance and productivity, leading to increased outputs and revenues.

To counter inflation, the minimum wage must increase periodically to ensure that workers can be cushioned from higher prices (Atkinson, Leventi, Nolan, Sutherland, & Tasseva, 2017). Inflation in the economy causes the price of goods and services to increase hence, the cost of living increases proportionally. With lower wages, workers are unable to survive on stagnant wages hence driving them more into poverty. Therefore, increasing the minimum wage ensures that the remuneration for workers increasing in consideration of the rate of inflation, ensuring that they can improve the living standards. Consequently, the effects of inflation are felt mostly by individuals working on a minimum wage thus, an increase in such wages ensures that they earn accordingly.

More so, workers can further their education and have funds available to improve their dependent’s education. This provides the opportunity for such workers to get better opportunities, which can further improve their lives. Therefore, having enough money to save for other activities such as education creates more opportunities for a significant population to rise from poverty, thus improving their social well-being (Atkinson, Leventi, Nolan, Sutherland, & Tasseva, 2017). The ability for workers to improve themselves also improves the labor force, with more people getting higher qualifications allowing them to pursue better careers with higher wages. A higher minimum wage thus empowers employees to pursue their interests in their quest to prepare them for better opportunities.

Disadvantages of a higher minimum wage

A requirement for higher minimum wages for workers will affect the rate of unemployment due to the economic impact on the organizations. With companies forced to pay higher wages for employees, they may be forced to lay off a considerable number of employees and reduce the number of individuals hired over particular periods (Marginean & Chenic, 2013). Companies that employ a large number of employees particularly face huge financial constraints when required to increase the wages of their employees. This is because small changes in wages to a significantly larger worker population may cause a massive dent in the organization's financial capabilities. Therefore, such requirements may force companies to reduce their workforces, which will increase the number of unemployed people in ana economy. An increased unemployment rate further has a significant impact on the economy with reduced purchasing power. Additionally, high unemployment leads to increased competition for the little available jobs due to the scarcity of opportunities and a large pool of workers. This may lead to instances of exploitation with workers willing to work under any conditions just to survive.

Apart from that, increased wages may lead to reduced revenues for companies since a significant amount of the revenue is redirected to cover the wages of employees. Companies always strive to increase their revenues in relation to their goals and objectives. Therefore, an increase in the minimum wage would require the company to tap into its revenue to bridge the deficit (Cengiz, Dube, Lindner, & Zipperer, 2019). On the other hand, employers might also dig into employee welfare and benefits to cover the deficit occasioned by an increased minimum wage. While welfare and benefits play an important role in employee renumeration, a significant number of employers would choose to reduce the benefits than dig into the company’s revenue to cover the increased wages. Therefore, higher wages ultimately affect employees in the long run due to the possibility of reduced benefits while companies are affected with reduced profitability with funds channeled to cover the increased labour costs.

More so, higher minimum wages can cause labour intensive companies to outsource their production to other regions or countries with lower labour costs. With labour forming a significant amount of a company’s operating costs, an increase in minimum wages increase this cost for the company (Marginean & Chenic, 2013). Consequently, companies may be forced to reduce their workforce or dig into profits to cover the deficit. However, companies that are labour intensive may be forced to look for cheaper alternatives that ensure maximum productivity at lower labour costs. Therefore, this may lead to a massive shift in outsourcing into other countries that ultimately denies the government revenue while also causing massive job losses. Such actions can massively impact economies and change the fabric of the industry especially if massive companies move their production overseas. This may affect a country’s economic base especially if manufacturing takes up a significant portion of the country’s economy. With the outsourcing of production, the skills are transferred to other countries which can then learn and later use at the expense of the outsourcing country.

Small firms in the economy dependent on a smaller labor pool may be affected by an increased minimum wage since revenues in such companies are little in most cases. With requirements on the minimum wage increased, the survival of such companies hang in the balance since they cannot afford to increase the wages with their tight budgets (Marginean & Chenic, 2013). Without alternatives, such businesses may be forced to declare bankruptcy or completely shut down due to financial constraints. Increased competition in certain industries results in smaller profit margins shared among small businesses hence owners must decide on investing to improve the enterprise and the increasing wage deficit. Therefore, small business may be negatively impacted by higher minimum wages with choices made on either shutting down or further cutting down on their labour force.

Conclusion

Higher minimum wages are a necessity in the changing world and rising economic outlook. While there are several advantages to workers regarding increased wages, companies and economies may also be impacted by the increased wages. Higher wages translate to increased living standards among employees due to their increased purchasing power which further boosts the economy. Higher wages also cushion workers living on a minimum wage from rising inflation thus preventing them from falling into poverty. Furthermore, workers become more motivated thus increasing productivity and performance with adequate renumeration.

However, on the other hand, increasing the minimum wage may force companies to reduce their workforce thus pushing more people into unemployment that ultimately affects the economic output. Companies may also be forced to dig into their profits to cover deficits brought with increased minimum wages thus reducing their overall profitability. Additionally, it may also lead to the outsourcing of production into countries with cheaper labour costs. Higher wages may also push small companies to shut down or declare bankruptcy due to limited finances to cover the increased labor costs. Therefore, the issue of increased minimum wages poses a dilemma for companies and countries in general requiring a proper balance to ensure that the interests of workers are covered while also protecting the viability of companies and the country’s economic outlook in the long run.