Minimum wage per hour refers to the actual amount in which both unskilled, semiskilled and skilled employees are supposed to be paid for one hour. Most economies have set the minimum wage per hour, which every employer should hand to the employees. The rationale behind setting a minimum wage per hour is to avoid exploitation of employees by their employers who would take advantage of labour regulation gaps to underpay their employees. This follows that the sole aim of setting minimum wage is to protect workers. The minimum wage is subject to regular revision, which means that it can be revised downwards or upwards. In the United States, the current minimum wage per how stands at $7.25, although many states have higher demands as compared to others. However, there is a proposal in which the federal government wants to raise this minimum wage per hour to $15 with the aim of reducing discrimination as well as stimulating economic growth.
The proposal to increase the wage per hour has ignited a debate in the US where others are of the opinion that the increase will have no impact on the economy, while other economists argue that the increase will have economic impacts both in the long run and the short run. This paper, therefore, seeks to critically analyze both the positive and negative economic effects of this proposal, both in the short run and the long run.
An increase in minimum wage per hour will increase the rate of inflation in the country. Increasing minimum wages per hour given to workers means that more money will be in circulation in the economy, or in other words, the purchasing power of employees will increase. This increase in liquidity will increase the demand for commodities in the market since more people will have a lot of money at their disposal to make purchases. This will, therefore, create a situation where a lot of money will be chasing a few goods in the market. Both the manufacturers and retail sellers will respond to the increased demand by increasing the prices of their commodities. The general increase in prices of commodities in the market is referred to as inflation (Cowen & Tabarrok, 2015, p86). A high rate of inflation is not healthy for the economy, especially if the government does not take control measures. This means that the proposal to increase the minimum wage per hour, although it may be welcomed by the employees, may have some negative impacts on the economy. However, if the proposal is implemented, the federal government must take some measures to reduce the increased purchasing power among the people, for instance, by increasing the rate of taxation.
An increase in minimum wage per hour will increase productivity. Essentially, when employers pay more to their workers, the workers feel psychologically satisfied. The pay rise, therefore, acts as a motivation to the workers, which translates into an increased work output. Studies show that when a company increases the wages of employees, the rates of work absenteeism as well as the turnover rate reduce significantly and hence productivity increases (Hails&Ascension, 2016, p78). However, companies will need to adjust their prices slightly so as to offset the increased payout cost. This would mean that if the proposal is implemented, many companies will perform better than before, leading to economic growth.
A rise in minimum wage per hour will result in an increased rate of unemployment. As the federal government enforces the proposal, companies will be forced to pay more to their employees, which means that labour costs will skyrocket. Companies will, in turn, be forced to lay off workers so as to reduce the increased labour costs. It is also worth noting that most companies will not be willing to increase their prices in order to offset the labour cost, and hence, they will prefer to lay off workers. This means that if the proposal is adopted, then the rate of unemployment will increase (Card, 2015, p43). According to the Heritage Foundation report that was published in 2016, the proposal to increase the wage per hour to $15 will render 9 million people unemployed. This rate of unemployment will have adverse impacts on the economy as a whole.
Increasing the rate of wages paid to the workers per hour will result in the growth of small businesses. More specifically, the wage increase will lead to the growth of restaurants. Studies show that most low-income earners tend to crowd too small restaurants near their workplace during lunchtime. Since these workers represent a significantly large population in the United States, their presence is the backbone of the restaurant industry. As their income is adjusted upwards, they tend to take meals more often as compared to when they were earning low income. This means that as the policy is implemented, restaurants and other small businesses will grow.
An increase in the minimum wage per hour will increase the rate of saving and investment, which will, in turn, accelerate economic growth. The policy Implementation will ensure that more money goes into the hands of the workers. This will means that workers will have a surplus after consumption, which would be saved for the future. Some workers will also prefer government securities with the aim of receiving some returns. As the rate of saving and investment rises, the rate of economic growth will rise.
The implementation of the proposal will also have some economic effects according to categories of workers, for instance, skilled, unskilled, semiskilled workers, young and old workers and different ethnities. Generally, many skilled workers, especially those with comparatively high salaries, will lose their jobs as their companies try to reduce the cost of labour, and therefore, these employees will be affected negatively. On the other hand, semiskilled and unskilled will benefit more since their average earnings per week will substantially increase.
This proposal, if implemented, will have a positive impact on young people. Young people under the age of 25 are minimum-wage workers. It is estimated that 11% of young people earn less than the minimum set wage as compared to only 2% of workers aged above 25 who earn minimum wages(Katz $Krueger,2013,p15). It follows that as the wage rate in increased, the number of young people who will benefit will be more as compared to the number of old people.
Some states will be affected more by this proposal compared to others. For instance, most people living in California earn a minimum wage or in other words, they are low earners. As the wage rate is increased, these low income earners will benefit more since their average earnings per week will rise as compared to other workers from other states. In Mississippi, most workers are skilled and hence receive comparatively high wages. Employees from this state will lose jobs as companies try to reduce the cost, and hence, they will be affected negatively by the proposal.
Similarly, part-time workers will be favoured by the pay rise policy. As wages are increased, the part-time workers will earn more than before, even if they work the same hours. However, full time workers may be affected negatively since they may be laid off for companies to reduce costs. Pay rise per hour may not affect them directly since they are not paid as per number of hours worked.
Racism minorities living in some states will be affected by this policy. For instance, it is estimated that 44.4% of people living in California are black people and Asians. A large portion of these people work as either semiskilled or unskilled, and therefore, they will be favoured by the wage rise policy if adopted(Card$Krueger,2012,p59). This is because their wages will be increased. Hence, they will have a higher weekly average earning as compared to when the rate was $76.25.
To conclude, the proposal to increase the wage per hour from $7.25 to $15 will have significant effect on the economy, some of these effects will be positive while others will be negative. It has also been seen that some of the effects will be in the short run, while others will be in the long run. Some of the effects of this policy will be an increase in the rate of unemployment, an increased rate of inflation, and an increased rate of savings and investments, among others.
Further, it has been seen that this policy will affect employees depending on whether they are skilled, unskilled or semiskilled. Skilled employees will be affected negatively since they will lose jobs as companies shed off the extra labour costs, while semiskilled and unskilled will be favoured by the policy since their earnings will Increase. The US government should keenly think about how to reduce the negative repercussions of this policy, such as increasing the rate of taxation to mop out the excess purchasing power from the people before implementing the wage rise policy.
It is worth noting that due to the interconnectivity nature of the economy, an effect on one economic variable will spread the effect to the other economic variables.
Work Cited
Cowen, Tyler, and Alex Tabarrok. Modern Principles of Microeconomics. Palgrave Macmillan, 2015.
Card, David. “Do minimum wages reduce employment? A case study of California, 2013–2015.” ILR Review 46.1 (1992): 38-54.
Card, David, and Alan B. Krueger. Minimum wages and employment: A case study of the fast food industry in New Jersey and Pennsylvania. No. w4509. National Bureau of Economic Research, 2012.
Hall, Ascension. “Principles of Macroeconomics.”,2016
Katz, Lawrence F., and Alan B. Krueger. “The effect of the minimum wage on the fast-food industry.” ILR Review 46.1 (2013): 6-21.
