The minimum wage has been used since the times of the great depression. In the recent years, the issue has become hotly debated on whether it should be raised and how this would affect the economy. Some people have long been questioning whether it should exist at all. The main issue is to understand the most appropriate way of reconciling the burden of increased minimum wage on small businesses with the need of employees. Moreover, the economist must also understand how increasing the minimum wage affects the profitability of an organization. The principal objective of this paper is to examine a number of fundamental issues concerning raising of minimum wage both in the society as well as on the American businesses.
Minimum wage is often defined as the lowest level of earnings per hour for all workers set by the government. There has long been two major fiscal and social argument concerning the issues of a minimum wage. Some researchers view minimum wage as a huge burden on small businesses while others argue that low minimum wage would increase the levels of poverty in the country(Clemens,135).Earlier researchers have shown that some businesses particularly the small businesses will cut the jobs to be able to pay employees more. According to research conducted by the non-partisan Congressional office, if the minimum wage is raised to $10 or $15, there would be the likelihood of reduction of the number of employees by 500,000 across the labor market, as businesses retrench workers to compensate for the increased wage rate. However, approximately 17 million employees would see substantial growth in their earnings.
Meer asserts that “the real impact of increasing the minimum wage are negative.”(123).The hurt small businesses raise the prices of commodities and also it is counterproductive for the poor employees. Most economist agrees that employees should be paid what they are worth. This implies that employees should be paid according to with their respective skills for the job. Considering this argument, the issue of minimum wage is not strong. First, in an open economy framework, the labor market will come up with the wage rate for jobs basing their analysis on several factors. The major factors will focus on the poor and the needy. Regardless of the circumstances that pushed them to the hardships, they should always be considered as important.
Effect on Small Business Employment
Small businesses will greatly be affected if the minimum wage is raised because the bigger percentage of their profit would be directed to pay for the high employee’s salaries. This would include the single largest expenditure for the businesses. However, it is controllable. If the government implement an increase in wage rate, the small businesses will reduce the number of employees or higher fewer employees to fully comply with the changes as well as maintaining their profit margin. Thus, increasing minimum wage has a direct impact on the rate of unemployment.
Increasing the minimum wage could add more pressure on the low-wage jobs which have a slightly higher rate compared to the existing one. This would also put more pressure on the compensation structure for the small businesses. It is important to note that any government’s mandate to increase the cost of doing business could bring about various consequences, where most of them would be negative. First, the prices of various commodities would rise since businesses would try to maintain their profit margin. Also, there would cause a huge loss of job opportunities if the businesses are forced to minimize their expenses to protect their profitability. It would also lead to automation.
In 2003, the Heritage Foundation conducted research in all the states in the United States and found that increasing the minimum wage could force an increase in the poverty levels due to the percentage those employed full time getting a minimum wage (Neumark,69).This implies that over 70% of those who will be earning the minimum wage workers on a part-time basis and do not depend on the income to sustain them.
It is important to note that labor is classified as a commodity and thus it is subject to market forces. If there is an increase in the minimum wage, the more skilled and educated employees would also demand an increase in salaries than the unskilled based on the government policies (Meer, 54-58).This would, in turn, increase the volatility in the labor market as the skilled employees are pushed to re-evaluate their values upward, which might go on the contrary with the needs of the employer.
The card supports this idea, in his research Card indicates that the evidence suggests that increasing the minimum wage even if pursued over some years would require being conducted with the greater deal of caution. Since the introduction of the minimum wage, it has been increased by 75% which is above the rate of inflation (48).Most of the increases have been motivated by much smaller increases and the great recession. Belman indicates that “although increasing the minimum wage would translate into more money for those receiving it. Thus it would have a very little impact on the US economy.”(112)
Despite many efforts to the contrary, there are still many opportunities for those who are willing to work extra hard to get more skills that qualify them for higher wages. The issues of the minimum wage should not be the end game, but instead, it should be treated as the beginning of a career path for those focusing on improving circumstances. Unfortunately, the current state has a huge number of people feeling comfortable with the welfare check, but have the full capability of working.
If the government has any intentions of improving the economy, it should focus on reducing the number of people on welfare. Raising the minimum wage over a substantial period would, in fact, boost the salaries of many American workers and reduce the number of those relying on welfare. It would also bring up the wage rate where it was in the 1960s.Therefore increasing the minimum wage over a period won’t be that burdensome on both small and large businesses or hamper economic growth. In fact, it could strengthen the consumer demand and improve the US economy.
Belman, Dale, and Paul J. Wolfson. What does the minimum wage do? WE Upjohn Institute, 2014.
Clemens, Jeffrey, and Michael Wither. The minimum wage and the great recession: Evidence of effects on the employment and income trajectories of low-skilled workers. No. w20724. National Bureau of Economic Research, 2014.
Card, David, and Alan B. Krueger. Myth and measurement: the new economics of the minimum wage. Princeton University Press, 2015.
Neumark, David, JM Ian Salas, and William Wascher. “Revisiting the Minimum Wage—Employment Debate: Throwing Out the Baby with the Bathwater?.” ILR Review 67.3_suppl (2014): 608-648.
Meer, Jonathan, and Jeremy West. “Effects of the minimum wage on employment dynamics.” Journal of Human Resources (2015).