Minimum wage is lowest legally accepted wages that an employer can pay a worker. It was introduced in the United States in 1938 during the great depression and was initially set at $0.25 per hour but has been adjusted 22 times by United States Congress. It was recently raised by Congress in 2009 from $6.55 to $7.25 per hour (Desilver, 2017). The policy has become one of the most discussed in the United States, with over 29 states creating policies to raise their wages above the $7. 25 per hour set by the federal government. Increasing minimum pay is one of the mechanisms of reducing income inequality, improving social welfare and enhancing growth with the economy. Many states in the United States have recognized that the current lowest wage of $7.25 is low and cannot sustain the economic well-being of workers (Desilver, 2017). Therefore, these states have passed legislation that makes the lowest wage more than that recognized by the federal government. However, there are fears that an increase in lowest legally acceptable wage could lead to increased unemployment because employers may be forced to lay off workers as well as reduce the number of hiring. In this paper, we consider the benefit and demerits of a policy to raise the minimum wage and recommend the best alternative.
Practical Pros and Cons of Minimum wage
Pros of Minimum Wage Increase
Raining the minimum pay increases economic activities and increase employment. An increase in wage increases the total amount spent by the household. Such increased expenditure boosts the country growth domestic product and consequently improves employment. A research carried out by the economic from the Federal Bank of Chicago indicated that an increase in minimum pay by $1.75 increase the spending by the household by $48 billion in a year, thus increasing GDP and improving employment (Aaronson " French, 2013). Economic policy institute also showed that increase in minimum wage from $7.25 to $10.10 per hour would add $22.1 billion in the economy and create approximately 85,000 in a period of three years (Cooper, 2013).
Research shows that an increase in the minimum pay helps to reduce poverty (Dube, Lester, " Reich, 2016). When wages are increased workers earns more as well as have more money to spend on goods and services of their choice. Such increase in money enables them to improve their standard of living and their wellbeing. A Congressional Budget Office report released in 2014 indicated that raising the lowest wage to from $7.25 to $9 would lift 300,000 persons from poverty. The report showed that 900,000 persons would be out of poverty bracket when lowest pay is increased to $10.10. Arindrajit Dube of the University of Massachusetts also indicates that raising the minimum wage to $10.10 would lift between 4.6 and 6.8 million non-elderly from poverty (Dube et al., 2016).
An increase in minimum wage would reduce the number of people depending on the government-sponsored programs. The result would be a reduction in the amount of government spending on such schemes. A report from Center for American Progress published in 2014 indicates that increasing the lowest wage by 6% from $7.25 to $10.10 would result in 6% or $4.6 billion decreases in the government spending on Nutrition Assistance Program (SNAP) (West " Reich, 2014). A research carried out by the Economic Policy Institute showed that raising minimum wage $10.10 would lift approximately 1.7 million Americans from depending on programs initiated by the government. The study showed that the increase in lowest pay to $10.120 would save $7.6 billion of the budget spending annually by the government on income-support initiatives (Cooper, 2014).
A higher minimum wage improves the productivity of workers and reduced staff turnover. As the wages increases workers become more attracted to work because there are greater benefits. The employees turnover and absenteeism also reduces because the marginal utility of working is higher. The increase in productivity and reduced turnover is supported by many economists including the chairman of Federal Reserve Janet Yellen and professor of economics at London school Alan Manning (Manning, 2014). A study carried out by the University of California indicates that turnover of restaurant workers and teens decreased following a decline in the minimum wage by 2% for an increase in lowest pay by 10% (Dube et al.,2016).
Studies have shown that increasing minimum pay result to a healthy population and prevent premature deaths. Rajiv Bhatia carried a study health impact of raising the minimum pay for Californian workers. The study discovered that the increase in California lowest wage to $13 per hour by 2017 would have a considerable effect on the health and well-being of people (Bhatia, 2014). The research found at a higher minimum wage, workers are able to sustain a higher standard of life. The study also indicated that individuals who are paid higher wages are less likely to smoke and suffer from psychological and emotional problems. Rajiv concludes that with a higher pay the number of premature death would be reduced by 389 per year (Bhatia, 2014). A similar study was carried out by the Bay Area Regional Health Inequities Initiative (BARHII). The study discovered that workers earning low pays are more likely to report poor health, inability to afford balanced meals as well as increased instances of chronic diseases. The researchers concluded that policies that increase workers’ pay lead to improvement in overall health and reduced the inequalities in reduce.
Cons of Minimum Wage Increase
Despite the benefits that come with an increase in increased pay for workers, opponents raise several questions on the impact of the raise on employment level, wellbeing of workers and economy in general. Opponents claim that raising minimum pay would result in increased poverty. Professor George Riesman of the University of Pepperdine argues that increasing wages lead poverty. He argues rise in worker pay increases the cost of production, prices, and reduced quantity of goods and services produced, thus leading to less employment. The increased prices make households to pay much from their pockets (Reisman, 2014). Similarly, the reduced quantity of goods and services produced reduces the amount available for consumption. The result of all these is an impoverishment of society. A similar argument is raised by Thomas Grennes of the University of California. According to Thomas wage rise would lead to the impoverishment of people even when there is no job loss. Thomas indicates that such rise in pay would significantly affect the poor (Grennes, 2015).
Raising minimum wage could result to increase in prices of goods which may eventually affect consumption by households. Aaronson " French (2013) argues that producers would pass almost 100% of the raise wages to consumers in the form of raised prices of goods and services. A study carried out by the Pardew university provide a similar conclusion. The study found out that when wages of fast food restaurants are raised from $22 lead to increase in prices by 25% (Sturn, 2016).
Research shows that increase in the minimum wages would disadvantage low skilled employees because from the perspective of employer they cannot justify higher wages (Sturn, 2016). A low skilled worker would not justify the increase in pay because of such increase call for additional skills and responsibility. The result is that that only highly educated personnel benefit from such increment. According to Reisman (2014), an increase in minimum wage to $10.10 would attract workers who initially did not consider jobs paying $7.25 per hour because of the higher wages provided. As result of the shift, low skilled workers who do not earn more than $7.25 would be exposed to a stiff competition from skilled, highly educated workforce to who can earn more than $7.25. Such competitions may lead to unemployment of the low skilled personnel. Research has shown that a 10% increase in the pay would lead to 1 to 3% decline in the employment of low skilled staff in the short term (Dorn, 2013).
Some economist argues that a rise in the minimum wage could reduce the upward mobility of workers in economic ladder. It eliminates the urge or motivation for skilled and experienced employees to work harder to reach high employment ladder. Professor Zimmerman from the University of Chicago argues that raising minimum wage could result in rigidities in the labor market which may prevent others from moving up in the economic ladder (Zimmerman, 2016). The rigidities could include the level of qualifications and experience needed for an employee to move from one level to the other (Zimmerman, 2016). According to Zimmerman, the rigidities could prevent both relative and absolute movement up the economic ladder.
Americans View on increasing Minimum Wage
Most American would vote for an increase in minimum wage. Gallup poll conducted in 2916 showed that 76% of American would vote for an increase in lowest pay while 22% would vote against it (Dugan, 2013). However, most of those who support the idea as mainly Democrats. Most of the Democrats argue that inflation and increased inequalities are major reasons why the minimum wage should be raised by the federal government. The increased inflation has reduced the real value of wages and an increase in lowest wage to $15 would be necessary to compete for the high inflation. The level of inequality between the low paid employee and the middle class continues to rise, thus raising concerns (Desilver, 2017). Most American shows preferences for increased the minimum pay as demonstrated by 29 states that have set laws approving higher lowest pay. A survey carried out by Pew Research Center indicated that 52% of American prefer higher pay. Most Republican oppose the increase in low pay. They argue that it can lead to unemployment due to layoffs. Republicans also argue that increased wages would hurt the middle class more because their wages would continue to be eroded by inflation without intervention from employers (Dugan, 2013).
Recommendation
The minimum wage has several positive effects on the economy including increasing employment, reducing poverty, reduce government spending, worker’s turnover and increase worker’s productivity. However, opponents of the policy argue that it increases poverty, increased prices and unemployment among unskilled. Based on this research many studies favor increasing the minimum wage. Therefore, it recommendable for the government to adjust wages to cater for the effect of inflation, inequalities and reduced poverty. The president of the United States should listen to the voices of American workers earning low wages and raise the lowest acceptable wage to $10. However, it would be prudent for the government to use sound economic principles while increasing the minimum pay. The best policy would be to determine the impact of inflation and then adjust wages to cater for the effects created by inflation.
References
Aaronson, D., " French, E. (2013). How does a federal minimum wage hike affect aggregate household spending? Chicago Fed Letter, (Aug).
Bhatia, R . (2014). Health Impacts of Raising California's Minimum Wage. Healthpolicy.ucla.edu. Retrieved 23 April 2018, from http://healthpolicy.ucla.edu/publications/search/pages/detail.aspx?PubID=1310
Cooper, D. (2013). Raising the Federal Minimum Wage to $10.10 Would Lift Wages for Millions and Provide a Modest Economic Boost. Economic Policy Institute. Retrieved 23 April 2018, from https://www.epi.org/publication/raising-federal-minimum-wage-to-1010/
Cooper, D. (2014). Raising the Federal Minimum Wage to $10.10 Would Save Safety Net Programs Billions and Help Ensure Businesses Are Doing Their Fair Share. Economic Policy Institute. Retrieved 23 April 2018, from https://www.epi.org/publication/safety-net-savings-from-raising-minimum-wage/
Desilver, D. (2017). 5 facts about the minimum wage. Retrieved 23 April 2018, from http://www.pewresearch.org/fact-tank/2017/01/04/5-facts-about-the-minimum-wage/
Dorn, J. (2013). The Minimum Wage Delusion, And The Death of Common Sense. Retrieved 23 April 2018, from https://www.forbes.com/sites/jamesdorn/2013/05/07/the-minimum-wage-delusion-and-the-death-of-common-sense/#79190bc661e8
Dube, A., Lester, T. W., " Reich, M. (2016). Minimum wage shocks, employment flows, and labor market frictions. Journal of Labor Economics, 34(3), 663-704.
Dugan, A. (2013). Most Americans for Raising Minimum Wage. Retrieved 23 April 2018, from http://news.gallup.com/poll/165794/americans-raising-minimum-wage.aspx
Grennes, T. (2015). Is the Minimum Wage an Effective Way to Reduce Poverty or Inequality? Retrieved 23 April 2018, from http://archive.economonitor.com/thoughtsacrossatlantic/2015/06/02/is-the-minimum-wage-an-effective-way-to-reduce-poverty-or-inequality/
Manning, A. (2014). Why Does Increasing the Minimum Wage Not Necessarily Reduce Employment? Social Europe. Retrieved 23 April 2018, from https://www.socialeurope.eu/minimum-wage-us
Reisman, G. (2014). How Minimum Wage Laws Increase Poverty. Mises Institute. Retrieved 23 April 2018, from https://mises.org/library/how-minimum-wage-laws-increase-poverty
Sturn, S. (2016). Do minimum wages lead to job losses? Evidence from OECD countries on low-skilled and youth employment. ILR Review, 0019793917741259.
West, R., " Reich, M. (2014). The Effects of Minimum Wages on SNAP Enrollments and Expenditures - Center for American Progress. Center for American Progress. Retrieved 23 April 2018, from https://www.americanprogress.org/issues/economy/reports/2014/03/05/85158/the-effects-of-minimum-wages-on-snap-enrollments-and-expenditures/
Zimmerman, S. (2016). Labor Market Institutions and Economic Mobility. Retrieved 23 April 2018, from https://www.urban.org/sites/default/files/publication/31191/1001163-labor-market-institutions-and-economic-mobility.pdf
