For sure, minimum wage causes employment. According to leading economists that includes famed billionaire investor Warren Buffet, unemployment can actually be raised by minimum wages. It merely gives employers fewer incentives for hiring. While at the same time, an increase/ rise in the minimum wage can also provide the same employers more incentives for automation as well as outsourcing tasks that the low-wage employees were previously performing. Also, the businesses are forced by higher mandated minimum wages to maintain desired margins of profit. In reality, less business can result from higher prices (Lavecchia 7). As a consequence, there will be less money for hiring and paying employees due to the less revenue.
Pushing for Higher Minimum Wage
Without a doubt, it is tough to support a family and make a living on a minimum wage income. Since the 1960s, it has been a fact that the increase in the minimum wage has failed to keep pace with the cost of living. Relative to the costs of living, the minimum wage's value peaked in 1968 in the United States. Ever since this value has been on a downward trend. As of 2015, the federal minimum wage stood at 7.25 US dollars per hour. Practically, the value of the minimum wage would have been close to about 11 US dollars per hour had it kept up with the increase in the cost of living and the inflation since the late 1960s (Lavecchia 11).
Feeling the lowered real income's pinch, the employees of the minimum wage, in addition to their advocates have gone greater lengths in recent years for raising awareness about the low-wage workers' plight. For example, various large cities in the United States that includes Los Angeles and Seattle, have resolved to boost the local minimum wage to 15 US dollars per hour. Even though the rise in the minimum wage puts more money in the pockets of a few individuals, some of the workers bear the costs as their hours minimized.
The Response of Companies to Higher Minimum Wages
A higher minimum wage in a perfect world would mean that the lowest paid employee at grocery stores, fast food restaurants, and so on making about $15 and not the usual $7.25 per hour (Lavecchia 13). In this case, everything else regarding the business models of these companies would remain the same. According to most economists, the world is not only imperfect but also confounded by a variety of other variables that the increase in the minimum wage effects. For example, some businesses designate a fixed quantity of money to wage expenses as they set their budgets at least one year in advance. Obviously, changes in the volumes of the business throughout the year can lead to some adjustments to the expenses of the wage. For the most part, there is a set idea developed by companies regarding the how much they want to hire workers.
Usually, companies consider hiring or assigning the same number of workers few hours to keep them from going over their predetermined limits of the wage expenses especially when they are forced to pay employees more per hour. In some cases, the companies chose to ship jobs overseas where the expenses of per hour of a worker are significantly lower. As a consequence, several people will be unemployed in such a scenario. Higher expenditures of wage can also be avoided by various companies especially the ones in the cities of Seattle and Los Angeles through the use of automation (Lavecchia 14). Instead of giving orders to a live worker, the company may decide to use computers to offer such service (Lavecchia 15). The computers are programmed to accept payments as well as serve customers with the ordered food staff.
Cause of Unemployment
The margin is one of the essential metrics for any business. It is also known as profit. Mathematically, it is the difference between the expenses and revenue. A target margin to be maintained is set by any successful business. During the rise of the expenses which normally occurs when a company's wage expense is pushed by a mandated minimum wage, the revenue rises for the organization to maintain its margin. As a result, some businesses raise prices in response to the higher wages. In case of an increase in the cost of making a commodity for covering the higher wages, clients can decide not to by such product because of its increase in price. In fact, the majority of people, for example, eat fast foods not because there are delicious, but because they are relatively cheaper than other meals. Effecting the minimum wage of the Seattle city to $15 has made several restaurants to collapse due to the resultant high cost of maintenance. Consequently, the $15 per hour jobs minimizes as quickly as they come when that happens (Lavecchia 17).
In February 2017, Bob Wright, the chief executive officer of Wendy said the firm expects wages to increase by about 4%. As a consequence, there were only three options for the CEO for offsetting the rising costs. In the first place, the company could decide to cut margins. However, that option is unlikely considering the 8% margin (Lavecchia 23). Another option was to increase prices. That too cannot be an option given how consumers nowadays price sensitive. Finally, the amount of labor used by the firm could be reduced. For sure, that is the only option the firm went for in dealing with the increase in the wage bill. In particular, a total of thirty-one hours of labor per location, per week was eliminated by the company. Nonetheless, their locations remain busy. Moreover, the company has the plans of installing automated kiosks in about sixteen percent of their locations to keep output steady. According to the CIO of the company, it would not take more than two years for payback on the machines mainly due to the labor savings.
Conclusion
Evidently, an increase in the minimum wage causes unemployment as already shown in the paper. Currently, the rise in the cost of labor creates margins in the sector to plummet. In such a scenario, some companies such as McDonald's automate their operations. However, the companies that cannot automate their systems are reported to be closing down thus increasing the number of unemployment in the country. For example, about 25% of the restaurant's closures in the area of California cited the rising cost of labor as one of their primary reasons for closing. For this reason, there should not be an increase in the minimum wage as it impacts negatively on the rates of unemployment. In this case, companies will be willing to employers more workers because of the ability to pay them accordingly.
Works Cited
Lavecchia, Adam. "Minimum Wage Policy with Optimal Taxes and Unemployment." SSRN Electronic Journal, 2018. Elsevier BV, doi:10.2139/ssrn.3110917.
