With the changing state of the global economy
Many governments and interest groups have emphasized on the minimum wage that should be paid in their different countries. Although the move is aimed at protecting workers from exploitative employers, it also affects other aspects of the economy including employment, government income, corporate development and the overall competitiveness of the economy (Krajewska et al., n.p). Legislators often consider that they can solve all economic issues through the development of policies and regulations. However, not all of these, especially corporate problems, can be fixed through this mechanism. Many states in the U.S like Virginia, Chicago, Washington, San Francisco, and Massachusetts have over the years implemented such laws with the belief that they will help improve the lives of their populations. However, from an economic perspective, they create more problems in countries that could have long-term implications for both individual citizens and the nation.
Effects of Increasing Minimum Wage
Low Business Growth. One of the many arguments on raising the minimum wage is its effects on the general business sector. In most cases, the laws stipulate a given percentage that should be allocated to worker depending on their job groups or expertise (Mărginean, Silvia, and Alina p, 98). Notably, the implementation of such policies dramatically raises the total operating cost of firms. This will, in turn, reduce the total income of the enterprise thus reducing its profitability and average competitiveness in the market. These developments will, in the long run, hinder the ability of the company to invest or capitalize on some of its opportunities due to lack of enough disposable income. As such, the growth rate of the firm will be minimized as it will only concentrate on paying its expenses, especially salary, and no allocation for growth or expansion of the entity.
Effect on Price.
The forces of demand and supply determine price in most economies in the world. However, other external factors including government intervention may also play an essential part in determining the overall cost per product in the market. Understandably, businesses consider different aspects when setting the price (Pettinger et al., n.p). Some of these elements include the cost of production, demand, prices of competing firms, the purchasing power of competitors and government regulations. In the case of an increase in minimum wage, factors such as prices of competitors and operating costs have a significant influence on the expenses incurred by an enterprise.
Once the government or the regulating body set a minimum wage, it increases the total expenses incurred by a business which in turn reduces the profit margin. Since this aspect cannot be corrected by the market forces, the company would have to increase the price of its commodities to cover the income lost in rising wages. In most cases, the burden is shifted to the consumer to allow the firm to maintain its position in the market.
Market Competitiveness and Economic Growth.
Every country or state has different minimum wage regulations that affect businesses within the local market. Labor cost is one of the factors that determine the growth of the economy from both micro and macroeconomic levels (Krajewska et al., n.p). With high labor cost, investors will be reluctant to increase their venture in a particular country but instead start their business in nations with more favorable policies (Mărginean, Silvia, and Alina p.101). According to the neoclassical theory, minimum wage increase results in some of the adverse effects on a country’s economy as it promotes inflation, unemployment and increases public expenditure. Thus, in the long run, it will make the products from the country to become less competitive in the global market due to their high prices (Pettinger et al., n.p). Therefore, this will lead to reduced average sales for institutions from the affected state and a consequent reduction in the total government income.
Effect on Employment.
Upon the implementation of minimum wage requirement, many employers will refrain from hiring more employees as this would not only increase their overall operating cost but also reduce to total income. For instance, some employers choose to employ one person in an opening that requires two or more individuals to cut on the expenses that the business would have incurred. The higher the minimum, the fewer firms will be willing to advertise job openings but instead prefer to integrate it into the responsibilities of the existing workers.
Increasing minimum wage will also result in the rising rate of unemployment in a country. In most instances, employers evaluate the total cost of the increase and how it affects both their competitiveness and survival in the market. If the expenses outweigh the benefits that the business acquires, some of the workers would be retrenched to allow the company to work effectively (Krajewska et al., n.p). Once the rate of joblessness grows in an economy, other vital complications may emerge including increasing dependency levels, crime rates, and overall government expenditure. Mostly, firms prefer retaining only the skilled personnel and dropping the casual or the less skilled individuals.
Implementation of minimum wage regulations promotes poverty in a country. Often, the people adversely affected by affected by the negatively of this policy are the less skilled individuals whose income are relatively low (Meer, Jonathan, and Jeremy 507). After losing their jobs, it may be very hard to find another workplace and therefore the inability to take care of their daily necessities. Also, seasonal employment such as those allocated to teens would not exist in countries such as America. Thus the jobless individuals would not be able to pay taxes thus contributing to reducing government income and its inability to meet its expenses. These occurrences would enhance the increase in poverty levels in a country and overall inability to compete with other growing economies.
Rise in Inflation.
Inflation as a factor of minimum wage increase is promoted by factors such as rising prices and the growth in salaries. For instance, during the 2007-2008 recession in the United States, the country recorded an un-proportionate increase in inflation due to the rising wages (Clemens, Jeffrey, and Michael n.p). The growth can also be enhanced by the growing spending of workers and growing cost for enterprises that causes wage-push inflation. These aspects increase the cost of living in the country and limits investors from establishing their ventures in the country.
Advantages of Minimum Wage
Although the idea of minimum wage remains controversial in most countries, proponents of these regulations site its increase implementation on the benefits it has individual citizens, companies and the general economy. Considerably, Minimum wage enables companies to retain only the skilled personnel that can adequately understand the trends in the market and boost a firm’s productivity. Additionally, this helps firms to concentrate on their core objective that in most cases includes increasing the wealth of their shareholders and growing their competitiveness in both local and international markets. It also enables institutions to set surplus capital to help to grow the business and to produce high-quality products that can meet the tastes and preferences of their customers.
Since the great depression, the implementation of minimum wage principles was considered a move to protect workers interest and rights of workers (Hirsch 2). This helps the government and relevant agencies to stabilize the economy by ensuring that all workers are paid appropriately according to their skills or efforts. The wages should be able to support them in providing necessities to them and their dependents.
Notably, minimum wage also acts as a motivating factor for the employees to get better services including insurance and health. When workers are paid well, they develop a different attitude to their responsibilities in the organization. It enables them to improve their performance, productivity and to become innovative (Hirsch 2). Furthermore, it helps in enhancing economic growth as both the workers and organizations will contribute positively in improving different aspect including inflation, government income and promoting a balance of payment.
A country can also gain social stability by implementing minimum wage regulations. Workers contented with the rate of payment are less likely to shift to different jobs thus improving the average turnover in companies. It may also help in solving other problems including poverty, insecurity and dependency ratio. Over time, this will assist in developing a stable neighborhood that can effectively support domestic projects.
The structural changes implemented in the labor market bring different complications that can affect the performance of both the company and the general economy. Minimum wage brings fourth various complications including reducing productivity, increasing inflation, promoting poverty and enhancing unemployment. These aspects have long-term implication to economic growth and may lead to the inability of the government to effectively carry out its operations properly due to reduced income.
Work Cited
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.
Hirsch, Barry T., Bruce E. Kaufman, and Tetyana Zelenska. "Minimum wage channels of adjustment." Industrial Relations: A Journal of Economy and Society 54.2 (2015): 1-45.
Krajewska, Anna, Piotr Krajewski, and Katarzyna Pilat. The Effect of the Minimum Wage on the Competitiveness of Economy Introduction. To Know Press, 2013.
Mărginean, Silvia, and Alina Ştefania Chenic. "Effects of Raising Minimum Wage: Theory, Evidence and Future Challenges." Procedia Economics and Finance 6 (2013): 96-102.
Meer, Jonathan, and Jeremy West. "Effects of the minimum wage on employment dynamics." Journal of Human Resources 51.2 (2016): 500-522.
Pettinger, Tejvan. “Effect of Minimum Wage on Economic Growth, Inflation and AD/AS.” Economics Help, 2017, www.economicshelp.org/blog/11503/labour-markets/effect-of-minimum-wage-on-adas/.
