Wage policy is a guideline applied to the determination of wage structure. Minimum wage policy refers to the least amount of salary that an employer is expected to pay employees for the services provided for a given period. It can mean the price floor below which workers should not sell their labor. It cannot be decreased by collective agreement or an individual contract. Minimum wages can be set through decisions by a wage council or by labor courts. The main purpose of minimum wage policy is to protect the vulnerable workers who lack the bargaining power to demand a satisfactory payment. Minimum wage laws set the least amount of money an employer can legally pay certain workers. As of 2017, the federal minimum wage rate in the USA is $7.25 per hour. The minimum wage policy has its benefits and drawbacks about different opinions given by people (Cascio, 2006).
Formerly, minimum wages covered relatively few groups of workers and was aimed at protecting principally those who were vulnerable. Minimum wage policy was first implemented in New Zealand in 1894, followed by the Australian state of Victoria in 1896 and then the United Kingdom in 1909.Minimum wages were in many instances regarded as temporary measures to be dropped off once wage bargaining between social partners would be established. Early forms of minimum wages were aimed to protect home workers or women. In the United States, minimum fees were put into place due to the working conditions of women and children. They were established at state levels and only applied to women and children (Howes, 2005). In 1923, the US Supreme court declared it unconstitutional leading to the development of Fair Labor Standards Act which was validated in 1941 by the Supreme Court.
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The number of countries with minimum wage policy grew after the Second World War. Countries like India and Pakistan which had gained independence adopted the policy. The fair coverage of minimum wages spread further with nations like Netherlands, Spain, and France passing it. In Africa countries that have taken and strengthened the minimum wage include Ethiopia, South Africa in 1997 and recently Cape Verde in 2014.Asian countries executing minimum wage policy are Singapore, China, and Brunei. The table below illustrates statistics of the proportion if regions that have adopted the minimum wage policy by 2014.All European countries have statutory minimum wage covering at least the private sector. Both American and Caribbean have approved and established the system while in Asia and Africa various countries have implemented policy. Few Arab states enforce the minimum wage policy (table 1).
Table 1. The proportion of the minimum wages of regions by 2014 .
Minimum wage laws enable individuals to receive just wages at various jobs. They elevate the income of least paid workers thus reducing poverty. Higher minimum wage is essential since it helps people meet their basic needs (Diener & Biswas-Diener, 2002).Efficient wage theory states that a higher income can be a motivation for people to work harder hence higher income increases productivity. Minimum wage elevates the incentives for the unemployed to accept a job, it promotes the participation rate as the benefits of workers become greater. There is an increase in investment since companies will have an increased incentive to invest and improve labor productivity because labor is more costly. Minimum wages counterbalances the effect of marketplace employers. In case a company has monopsony powers it can employ fewer workers to drive down wages. Minimum wage laws make this difficult hence a positive impact on employment. The government can use minimum wage laws to force firms to pay all individuals equally, regardless of race, religion sex or other features.
On the other side, minimum wage laws can be seen as price control discouraging firms from hiring many workers. This distorts the basic theory of demand and supply upon which companies make decisions. For instance, if consumption of a certain product increases, the firm should increases the product output thus requiring more labor. The company may forgo additional labor if government price control force employers to pay higher wages to the employees than the job is worth. Minimum wages can result in cost inflation; this is because the companies face an increase in cost which can be passed to the customers. Minimum wage laws may increase the number of people working in the black market. The disadvantage of minimum wages is that it doesn't increase the income of the least paid groups. This is because the poor have to rely on benefits which are not affected by minimum wages. The proportion of countries with minimum wages is higher in high and middle-income groups than the low-income group (table 2).
Table 2. The proportion of countries minimum income based on income group
Many who benefit from the minimum wages are the second income earners hence the household is probably below the poverty line. A family with a single income earner above the minimum wage is likely to be a poor. Minimum wages may be considered as being maximum by employers of some companies. If a worker is very efficient, he will be paid the amount fixed by the government which is low. This will result in curbing the incentive for the workers and thereby decreasing the efficiency. Fixation of minimum wages or all workers in a country is a very difficult task. In case a higher minimum wage is fixed at a particular place, it will not benefit the employers (Howes, 2005). They will otherwise opt for machinery for labor instead of employ workers; this will results in massive unemployment in such states. There could be difficulty in enforcement of the laws in cases where the labor is unemployed, the employer and worker may decide to work at a wage lower than that fixed by the government. Minimum wage causes disorganization in business. Minimum wages do not offer personal growth and opportunities since most people working on low wages lack fully developed skills. They still have to work to meet their insatiable needs.
Minimum wages sometimes have unintended consequences; for instances, it increases an individual's income tax liability. Some nations have put in place progressive income tax systems demanding individuals to pay more tax as their income increases. Therefore setting high minimum wage may result in paying higher taxes. Minimum wage laws may create problems for higher paid workers since they don't receive benefits from the laws. They may work for several years without an increase in income depending on the firm for which they work. Consistently increasing minimum wages may require businesses to raise wages to higher paid individuals, this elevates the cost of running a business.
According to recent research, approximately 75% of Americans support raising the Federal minimum wage from $7.25 to $10.10 per hour. Raising the minimum wage can boost the citizens feeling of political efficacy and responsiveness. It can also promote greater social connection and integration. Ability to develop friendship and connections in a workplace with other workers and the bigger communities improves the experience in the workplace. Stable workers receiving high wages become invested in their workplace and nurture personal networks. Well paid employees tend to be content with their job thus decreasing the rate of turnover in the workforce. There is consistent evidence that high wages within an economic sector decrease the general rate of job turnover in that sector (Howes, 2005).
Another disadvantage of raising the minimum wage is that it hurts the vulnerable. As much as the minimum wage would reduce poverty, some of the benefits would be offset like medical allowances due to increased cost (Belman & Wolfson, 2014).Higher minimum wages prevents companies from creating new positions or upgrading their workers hence fewer employment opportunities. The artificial increase in minimum wage floor results in increased prices of commodities and housing cost. These majorly affect the low-income group. Raising minimum wages can be an example of government intrusion into the private sector affecting private economic decisions made by individuals and companies. This limits individual freedom and deprives citizens' sense of personal autonomy (Belasen & Hafer, 2012).With all these documented ill effects, raising the minimum wage will affect the overall well-being of people in a community.
Another factor to consider is that raising the minimum wage of a worker focuses on the cynical nature of income needs. Benefits associated with high wages continue up to a certain point. This is because human needs evolve as one makes more money and they are insatiable. Minimum wage worker might be comfortably meeting his needs. However, this dissipates as the individual develops new needs, desires and wishes. It's unlikely for minimum wage workers in one state to compete for their salaries to other minimum wage workers in other states. They will usually compare it to those earning high wages in their community. Therefore, despite increasing the minimum wages from$7.25 to $10.10, after some time it will dissipate, and there will be calls to raise the minimum wage again. Despite the negative effects of minimum wage on employment it still has its benefits to consider as an individual. It's important to advocate for a higher federal minimum wage because of the adverse effects of poverty on individual and societal outcomes.
References
Belasen, A. R., & Hafer, R. W. (2012). Well-being and economic freedom: Evidence from the states. Intelligence , 40(3), 306-316.
Belman, D., & Wolfson, P. J. (2014). What does the minimum wage do ? WE Upjohn Institute.
Cascio, W. F. (2006). The economic impact of employee behaviors on organizational performance. California Management Review, 48(4), 41-59.
Diener, E., & Biswas-Diener, R. (2002). Will money increase subjective well-being? Social indicators research , 57(2), 119-169.
Howes, C. (2005). Living wages and retention of homecare workers in San Francisco. Industrial Relations: A Journal of Economy and Society , 44(1), 139-163.
