In American companies, the low level of hourly wages offered is known as minimum wage US. Recently, the rate of this pay is $7.25 for every hour (Amadeo, 2017). Law for minimum wage is also prevalent in most states. The employers will receive that which is higher, state or federal minimum wage. The reason behind designing these laws of the minimum wage is to halt employers who are misusing the poor workers. This concept must not be mixed with the lowest living wage. Even though minimum wage saves workers from being exploited but it is deprived of having pace with the prevailing inflation. In fact, for 52 weeks at a rate of 40 hours for every week, minimum wage equals to $15,080 each year. According to the federal level of poverty, it is higher than enough, but for a family of four persons, it is quite lesser than the level of poverty. In simple words, if somebody with a family of 4 to 5 individuals is attempting to support them through the minimum wage, then he would meet the requirements for the federal poverty support (Amadeo, 2017).
Pros and Cons of Minimum Wage
There are many arguments in favor or against for whether for any economy this minimum wage law is good or not. Mostly, those favoring this wage law are connected with labor force while those against are linked with businesses.
Pros of Minimum Wage
Providence of enough income is intended by minimum wage laws to meet the requirements of a living salary. This amount is equal to that which is required for having enough shelter, clothing, and food. So, the first benefit is that it allows children and women who are most vulnerable, to remuneration for their living expenses and this enhances worker’s morale (Hendrickson, 2014).
Secondly, through this, there is an increase in productivity as it is making sure that workers are not overloaded with work and also have plenty to eat.
Thirdly, the minimum wage is an incentive for the upsurge of economic growth as it offers workers more salary to spend. Thus, it results in increased demand, a boost up in business development.
Fourth, if workers have more money and time, then they will invest more in their education. This automatically results in productivity growth and enhances the desirability of country’s labor force. A well-educated labor force increases the amount of small companies and innovations (Hendrickson, 2014).
Fifth, a business can dig more out of this law of minimum wage as workers will not leave for high paying jobs. This results in reducing the turnover and retraining expenses as well.
According to Brock Haussamen, an economics professor, a person earning minimum wage is not utilizing as many public services as somebody on unemployment. An unemployed labor is given rent assistance, welfare, and food aid in the majority of states. Through minimum wage, the necessity for having public assistance is reduced, and this also lowers the tax burden on the state and community (Abowd, Kramarz, Lemieux and Margolis, 1997).
Located in Washington, D.C., Economic Policy Institute is a research group for economics, revealed a conclusion in its study conducted in 1999 that almost 40% of the US minimum wage earners are working parents. If we look further, 33% married couples having children are minimum wage earners. So, without having a minimum wage, all these workers will be forced to work at fewer rates (Hendrickson, 2014).
For an unemployed labor, the minimum wage is an incentive to grab that job, as he is aware of what will be the minimum pay, according to Economics Help-an economics website. That unemployed individual will compare that minimum wage with the public assistance he s getting and then determine whether he should take the job or not.
Cons of Minimum Wage
As salary of the labor force is the biggest budget element for the business owners, so they point out the laws of the minimum wage as a reason for an increase in labor costs. As if they have to pay extra, they will be bound to hire only a few labors if they wish to maintain the labor cost at the same level. Resultantly, there is an increase in unemployment rate. More specifically, low-wage workforces are facing more tough time, as only a few jobs are available to compete for (Hendrickson, 2014).
Secondly, most of the small level companies are not in a position to hire fewer labors. They might be facing to proclaim bankruptcy as an alternative. Thus, labor-intensive companies are getting penalized through minimum wage. Automatically, this is in favor of those industries which are capital intensive. With time, this will lead to a gradual shift of economic base of a country.
Third, there is an increase in job outsourcing because of minimum wage laws. Companies will move towards countries where there is low labor cost.
In competitive labor markets, there would be unemployment due to minimum wage because there is increased the supply of labor force due to high salaries and a decrease in labor demand. Firms that are located in industries which are labor intensive will face this situation mostly. As an example, cleaning and hairdressers companies will see a huge increase in their wage bills (Neumark, Schweitzer and Wascher, 2004).
Fourth pros are, the primary goal of laws of minimum wage might not be addressed, i.e. reduction in poverty. As due to an increase in unemployment, we can see the increase in poverty level above average. (Sources: David Newmark and William Wascher, Minimum Wages, MIT Press. “A ‘Very Credible’ New Study on Seattle’s $15 Minimum Wage Has Bad News For Liberals,” Washington Post, June 26, 2017.)
Cost push inflation may be resulted due to minimum wage. As the firms are having an increase in labor costs so they would likely pass it to the customers.
Most of the people who are getting benefits from this minimum wage law are secondary earners, so their household is suspect to be lower than the poverty line. On the other hand, a family having single earner with minimum wage would be relatively poorer. But still, they will not enjoy the benefits of the minimum wage (Neumark, Schweitzer and Wascher, 2004).
The basic limitation of this minimum wage law is that group having lowest income is not getting any increase in their incomes. The reason is, the poorest people are relying on the pros, and thus minimum wages will not affect them (Hendrickson, 2014).
The Benefits Offset the Drawbacks Up to an Opinion
According to some researches, minimum wage assists in increasing jobs openings in any economy. Companies may find other methods to offset this increase in labor cost, by reducing working hours of labors or by increasing product price.
But the benefits of these laws offset the cons only if the rate of minimum wage is not too high. The flexibility of business should not be reduced because of wages as employers will reduce labor cost during the economic downturn. While setting range of minimum wage, sweet spot should be found by the government between worker’s protection and providing businesses a flexibility they require to stay competitive in the market. (Source: “Sense and Nonsense About Minimum Wages,” The Economist, November 10, 2012.)
Considering the supply and demand where there is an equilibrium for the economy, minimum wage performs just like price floor. The mechanism of price gets disturbed if the wage level is higher than the equilibrium, it means that market is not clear, and workers find it difficult to have a job. The non-price competition will arise, such as worker’s age, personal connections or experience would replace the price competition, it makes it tougher for unskilled or younger workers to find jobs. This simply means that minimum wage policy would have negative effects that will cause too much damage to the labor market.
Abowd, J. M., Kramarz, F., Lemieux, T., & Margolis, D. N. (1997). Minimum wages and youth employment in France and the united states. Cambridge: National Bureau of Economic Research, Inc.
Amadeo, K. (2017). What Is the US Minimum Wage? Pros, Cons, and Facts. Retrieved from https://www.thebalance.com/us-minimum-wage-what-it-is-history-and-who-must-comply-3306209
Hendrickson, M. (2014). The Minimum Wage Nonsense Impedes Economic Progress. Forbes. Retrieved from https://www.forbes.com/sites/markhendrickson/2014/01/21/the-minimum-wage-nonsense-impedes-economic-progress/#632fad436646
Neumark, D., Schweitzer, M., & Wascher, W. (2004). Minimum wage effects throughout the wage distribution. Journal of Human Resources, 39(2), 425-450.