Following the financial downturn that ended in 2009, the United States of America is still struggling to recuperate. In that time, the economy and capital markets of America suffered catastrophic losses stemming from unforeseen circumstances that ultimately plunged the country and the entire world into an economic quagmire. Consequently, at the local, state and federal governments, policy makers were considering solutions to help the less fortunate in America attain economic freedom and ensure their monetary stability. One particular suggestion that gained quite a lot of traction was the augmentation by an upsurge of the rate of the minimum wage at both the state and federal levels. The idea to elevate the minimum wage is by far the one that is usually preferred by most law and policy makers but through years of economic research is one that has been found not to be effective and is consequently, mired with quite some disadvantages. Proposals such as these eventually end up hurting the less-experienced, less-educated and lower-income Americans. In addition, the increase in wages results in a burden on businesses, particularly small and micro enterprises, individually owned companies, and those that have a little flow of income. Such companies, especially those struggling in the economy after the recession undergo tremendous strain as a result of the increase in minimum wages.
A brief history is of utmost significance in understanding how the escalation of minimum wage leads to dire side effects. Congress enacted a law in 1938 that instituted minimum wage that was to be adopted at the federal level. However, local government and state entities placed their wage that was above that of the federal statutes. The result of this was the permeation of variations in minimum wage across the different states. Moreover, since the states had authority in setting the minimum wage, they went ahead and set it exorbitantly high that in certain states, the minimum wage exceeded the federal stipulation by close to two dollars. Led by Washington State, which had a $9.32 per hour minimum wage, Twenty-one states now place their rate of minimum wage rate at a price that is immensely higher than the national minimum. While this is so, the rate of twenty other states is largely equivalent to the federal remuneration, and the nine remaining have wage rates that are lower, but employers are still required to pay the required federal rate (The American Legislative Exchange Council, 2014). In 2012, a survey indicated that only 4.7 percent of those employees who were paid hourly could earn the stipulated federal minimum wage rate or even in some cases less than that ("U.S. Bureau of Labor Statistics", 2017). However, sound evidence and relevant research demonstrated that the increase in the minimum wage had pertinent disadvantages. Nonetheless, activists at the federal, state, and resident levels persisted in their support of pay increments. In recent times, President Barrack Obama increased the minimum wage for all contractors working for the federal government to $10.10 every hour and recommended Congress to elevate wages for every employed individual. Several states such as Alaska, Massachusetts, Idaho, South Dakota, and Maryland have all lobbied for the state wages to increase to up to $15 per hour.
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Currently, debates regarding the subject on minimum wage persist, and as this issue traverses before state legislatures all over the country, policymakers need to gird themselves to engage in a matter that is highly fraught with hidden political landmines. Perhaps one of the major effects that increment in the minimum wage will have is on the employer. Such a downscale in business confidence will hurt many sectors of the economy and will cause a ripple effect that eventually may be too hard to govern (Congressional Budget Office, 2014). After the government imposes a wage larger than the current one, the labor costs will proliferate, and in turn, employers will be forced to respond by reducing the production expenses promptly, and this includes downsizing and other strategies that are going to hurt other individuals (Wilson, 2012). Other plans may include making capital investments that are labor saving, which in turn will reduce the reliance on employees, replacing the less-skilled individuals with a highly-skilled team or mitigating pay elevations in employees who seek a minimum wage that is higher. Such adjustments and much more that involve the reduction of the number of hours’ employees work, their non-wage benefits, or training will continue to persist as long as an increase in the minimum wage continues to take place.
The logic behind this is that businesses can not go on meeting the expenses of paying employees more money yet their production is constant on aggregate. Since employees who are paid minimum wage lack the productivity to command a higher pay than the rest or are inexperienced and unskilled to deliver, they are subsequently paid less. While this is the case, advocates who are for an increase in the minimum pay present their arguments that businesses can pay higher wages to employees but they nonetheless choose not to. Such arguments rest their hopes on the premise that companies are simply willing to take a hit on their profits while prices and employment remain unaffected. While this may work in big corporations, a good number of minimum wage employees work for micro-enterprises that attain such marginally small profits that while it may seem feasible to enact such laws that increase the minimum wage, it may not be implementable practically. An examination by the Institute for Employment Policies indicates clearly that slightly over one-third of the minimum wage workers are employed in business premises that have 100 employees or less (Saltsman, 2013). Since micro-enterprises are in competition in an unfavorable market, they are left with no choice but to mitigate expenses as low as possible for them to conduct a viable business. The same happens to minimum wage earners who work for large corporations since such companies are often under immense pressure from shareholders who often request them to keep expenses low and profits at a certain level.
In 2013, a Californian issue of an independent business magazine projected that the possible consequences of the legislation of the state concerning minimum wage were profoundly negative and that it would shrink its economy by $5.7 billion in the next ten years (National Federation of Independent Business, 2013). Additionally, it further predicted that there would be a loss of close to 68,000 jobs and to inflate the matter further, 63 percent of these jobs would have originated from micro-enterprises that would have been rendered unable to pay their employees the minimum wage required by state law. The underscore here is that any financial increment by statute or law has to be met by another party elsewhere. In this case, someone has to pay for the increased minimum wage, and it is often the business premises, which do not have excessive profits that cannot incur losses by supporting minimum wage requirements. What results is that since companies cannot pay the cost, the undereducated, low-skilled individuals who lack job opportunities often pay for it. Moreover, since the cost of business rises because the business owners have to pay their employees heftily, the cost of products also increases profoundly making it difficult to satisfy clients.
Raising minimum wage affects unemployment negatively. In essence, the raising of minimum wage results in higher unemployment rates. Under the original neoclassical competitive market archetypal used in the analysis of minimum wage effects, the upsurge of the price of merchandise or other types of services decreases the demand for that particular service or merchandise (Neumark, 2010). In the case of the rate of wages, while the national government escalates the labor price through minimum wage increase, employers will consequently petition for its reduction. Inasmuch as research prior to the commencement of the minimum wages have come to purport that the decline in employment is commensurate with the growth of minimum wage, the outcomes of minimum wage laws continue to baffle the economic world. This is the most studied question in the world of economics (The American Legislative Exchange Council, 2014). The use of data from various time-series and other deviations in the federal wage was highly employed during the initial research of the wage’s effect on the employment rate. This research came up with the results that increases in wages tended to mitigate the levels of employment. However, during the 1990s, economists commenced using the variations on state minimum wage to come up with the effects of minimum wage. These results were conversely conflicting with some indicating slight positive effects while others showed increasingly robust negative impacts.
Insofar as research is concerned, the minimum wage may be a complicated issue that requires the analysis of many variables. However, the effects of minimum wage appear practically in the business world every day and are supported by more than seven years of intensive research (The American Legislative Exchange Council, 2014). One particularly noted assessment by William Wascher and David Neumark indicate that in the studies conducted, 63 percent of them revealed that there is relatively consistent evidence of adverse effects on minimum wages. A similar study carried out by the Heritage Foundation came to the conclusion that the present suggestion in Congress and proposals to raise the minimum wage will indeed eradicate close to 300,000 jobs per year. This would, in turn, reduce the GDP by a typical $40 billion yearly (The American Legislative Exchange Council, 2014). These numbers indicate the adverse effects on employment and most economic analysts continue to predict that they will be profound in the coming years as more employers are making a shift from ineffective methods of production to more labor saving methods. Currently, the Automatic Teller Machines (ATM) have replaced bank tellers, the elimination of gas jockeys has taken effect, and there are continuous talks of the use of robotics in almost all industries. Such automation will eventually cut out the minimum wage workers, and to compound the problem is the increase in minimum wage.
Another effect is that of inflation. As stated earlier, raising the minimum wage brings about problems in the pricing of products. Such situations are what economists call the “price pass-through.” In a study on prices at fast food industries, which is an industry that employs many low-wage individuals, the growth in minimum wage led to an escalation in the price of the food items. Such tactics by business owners are as a direct result of government policies such as the increase in minimum wage. In addition, economic literature supports this particular subject. When one clearly and concisely examines the available literature on the issue of consumer products inflation, most studies predict that an escalation in the minimum wage by 10 percent would inarguably result in 4 percent increase in the food prices, which consequently results in an overall 0.4 percent price increase (Kelley, 2017). Such increment eventually hurts the economy and leads to inflated prices thereby making life harder for the hard working citizen. In conclusion, although increasing the minimum wage has been purported to help in eradicating some of the societal problems like poverty, the whole concept acts oppositely in the overall sense that it hurts the people it is meant to protect and help.
References
Congressional Budget Office. (2014). The Effects of a Minimum-Wage Increase on Employment and Family Income (pp. 3-12). Retrieved from https://www.cbo.gov/publication/44995
Kelley, P. (2017). Early analysis of Seattle’s $15 wage law: Effect on prices minimal one year after implementation | UW Today . Washington.edu . Retrieved 20 June 2017, from http://www.washington.edu/news/2016/04/18/early-analysis-of-seattles-15-wage-law-effect-on-prices-minimal-one-year-after-implementation/
National Federation of Independent Business. (2013). Economic Effects of a California Minimum Wage Increase: An Econometric Scoring of AB 10 . Retrieved from http://www.nfib.com/LinkClick.aspx?fileticket=zQxnYkqQWV0%3d&tabid=1083
Neumark, D. (2010). Employment Effects of Minimum Wages. Southern Economic Journal , 76 (3), 592−623.
Saltsman, M. (2013). Who Really Employs Minimum Wage Workers? The Wall Street Journal .
The American Legislative Exchange Council. (2014). Raising the Minimum Wage: The Effects on Employment, Businesses, and Consumers (pp. 1-5). Arlington, VA.
U.S. Bureau of Labor Statistics . (2017). bls.gov . Retrieved 20 June 2017, from https://www.bls.gov/opub/ted/2013/ted_20130325.htm
Wilson, M. (2012). The Negative Effects of Minimum Wage Laws . Cato Institute.
