Introduction
Minimum wage refers to the amount of remuneration provided by the employer to a worker for work done during a specified period; the minimum payment cannot be negotiated through individual contract or collective agreement (Grimshaw et al., 2014). The salary can be set by a wage board, council, labor courts/tribunals or a statute. Its primary purpose involves protecting low wage workers. Thus they get an equitable share of the total income. Additionally, minimum wages can be used in reducing poverty and inequality, including those between high and low monthly income earners, and between men and women. The first minimum wage law was passed in New Zealand in 1894. Also, another wage law passed in 1983 (the Fair Labour Standards Act) in the United States raised the minimum wage 22 times more (MaCurdy, 2015). Thus, in July 2009, the salary was set at $7.25 an hour. The Act of 1983 was implemented by industries whose combined employment averaged to 20% of the total labor force (Kapelyuk, 2015). However, the coverage for low and high-income workers has been increased over time, and now the wage covers about 125 million employees or 90% of the total labor force. The primary aim of this paper is to give a critical assessment of the economic impact of increasing minimum wage.
Can increased minimum wage help decrease poverty in a country?
Raising a country’s minimum wage could lead to either an increase or decrease in poverty, depending on the characteristics of the labor market. Mostly, the minimum wage targets employees from the formal industry, those from a minority in many nations and whom many live in affluent neighborhoods (MaCurdy, 2015). Whether or not raising the minimum wage reduced poverty, solely depends on factors such as some employees losing their jobs; how the relevant laws are enforced; whether the social safety net is intact; to what extent the wage affects informal workers and whether these low wage laborers live in poor neighborhoods.
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An increase in the minimum wage could lead to a reduction in poverty, mostly in developed Nations. However, the effect is diffident as it only affects a minority of the low wage earners; more specifically, it does not cover the informal workers (Kapelyuk, 2015). Moreover, raising the wage leads to negative and positive effects in equal measure, and this depends on factors such as wage distribution; effects of employment and how the head of the family is affected. Increasing the minimum salary can be part of an overall poverty reduction scheme, but does not have to be the only solution to the same.
In support of this, a higher minimum wage reduces poverty. Simply, when increasing salaries for low-wage workers, this allows them to buy more essential commodities. Thus, if their wages are raised, the income of poor people will increase thus elevating them from poverty (Meer & West, 2015). The statement sounds easy in theory, but it is difficult to apply practically, this is because there are limiting factors such as employee wages, the level of poverty and employment rate in that particular country.
First, the minimum wage is not applicable to all employees in equal measure. Therefore, it is vital to understand how all workers are affected. Second, albeit increasing the minimum salary leads to poverty reduction for low wage earners, it might not lead to the overall rise of income in poor households (Neumark & Wascher, 2015). In third world countries, the informal sector is typically large and filled with minimum wage workers with no form of legal protection. Moreover, their educational background is given little consideration. Thus, the predominant factor in these areas is poverty. Also, minimum wage laws are not fully enforced in the formal sector.
Also, other employment factors such as qualification and job experience are put into consideration. Increasing the minimum wage can lead to laying off some workers by employers. If these unfortunate workers live in poor households, their poverty level is likely to increase. Layoffs lead to increased downward pressure on formal and informal workers. Consequently, increased unemployment slows economic development.
Does increasing minimum wage lead to an increase in employment?
According to conventional analysis of the economy by Grimshaw et al. (2014), increasing the minimum wage leads to unemployment in two ways. First, increased wages add to the cost of production for employers. Some pass this increased cost to consumers through the increase of product and service prices, and thus these higher prices affect the demand, therefore low revenue (Nyberg et al., 2016). Consequently, employers are left with the option of producing fewer goods and employing fewer workers. Thus commonly known as the scale effect, and leads to the increased unemployment rate among low and high-income workers.
Second, increasing the minimum salaries leads to increased costs for the employers relative to other inputs they use in production, these include machines, more productive high-income employees and technology (Kapelyuk, 2015). Thus, some employers respond to this by reducing the spending on informal workers and focusing on other input methods. Therefore, this shifting cuts employment for informal workers, but increases employment for formal workers, commonly referred to as the substitution effect.
Nonetheless, the conservative analysis of the economy does not include all circumstances. An example, when a firm is hiring more employees and looks to increase income for the existing employees, the company suffers from increased costs associated with wages for the new workers and retain the current employees (MaCurdy, 2015). Under these circumstances, which often arise when searching for employment leads to consumption of time and costs for workers, increasing the minimum wage results to increased costs, thus lowering the additional cost of hiring new workers, leading to decreased employment.
Nevertheless, low-wage employees are not the only ones affected by an increase in the minimum wage, the employment rate of high-income workers is also impacted negatively. Companies that resolve to reduce the cost of production also reduce the number of employees in the low and high-income groups. After increasing the wage, some employers tend to preserve discrepancies in the existing wages, for instance, by raising the salaries of supervisors so that they continue earning more than other employees (Nyberg et al., 2016). Additionally, some salaries negotiated through the collective bargaining agreement are connected to the federal minimum wage and thus increase. Hence, raising the minimum wage leads to workers who would otherwise have earned more. Losing their jobs, under similar circumstances that low-wage workers are. Some companies hire substitute workers to replace workers whose salaries were supposed to be increased.
Changes in the level of employment resulting from increased minimum wages vary from company to company. The rate of employment reduces more in firms whose clients are sensitive to increases in the price of goods or services since demand for their products declines when prices increase. Thus these firms result in cutting production costs. Also, employment reduces more in companies are in a position to comfortably substitute low-wage workers from other inputs, and firms where low-income workers from a large part of the production costs (Grimshaw et al., 2014). Nonetheless, when low-wage employees have fewer employment options, the level of employment falls less in firms that balance between the increased costs and higher productivity from high-income employees who increase their performance to maintain their positions. Some companies, specifically those that don’t employ low-wage employees but compete with companies that do, might experience an increase in demand for their products as rival firms increase prices. Such firms result in hiring more low-wage employees.
Also, the change in employment for low-wage workers changes over time. Initially, when the minimum wage is raised, some companies hire fewer low-wage workers, while others do not; thus reduced employment is concentrated in industries where high product prices result in significant demand reduction. Over an extended period, however, more companies replace low-wage workers with relatively less expensive inputs, such as more productive high wage workers. Therefore, the percentage reduction in low-wage workers employment is more significant in the long run than in the short run according to CBO’s assessment (Meer & West, 2015).
Employees can respond to increase n minimum wages in other ways other than raising product prices or laying off low-wage workers. For instance, they might reduce other costs such as employee benefits, job perks. Thus, a higher minimum wage can lead to increase in total compensation (including perks and benefits), less than it increased salaries only (Kapelyuk, 2015). In turn, this would provide employers with smaller incentives to reduce their employment of low-wage workers.
Nonetheless, reducing employee benefits in such a manner would be modest, partly because low-income employees have fewer benefits in the form of pensions. Additionally, the rules of tax give a specification that employers who reduce low-income workers’ nonwage benefits are liable to unfavorable tax treatment on the side of high-income earners’ nonwage benefits. Also, leaders can partly offset higher wages for low-income employees through the reduction of informal employee development programs.
Behavioural effects of increased minimum wage on employees
In countries such as America and Britain, bills have been passed to increase the minimum wage up to $15 per hour. Moreover, it is not just workers calling for a wage increase, a survey by (Grimshaw et al., 2014) revealed that 70% of employers believe in the wage increase.
After Walmart Company decided to increase their employee salary in 2015, their sales started increasing, and the rate of stores hitting their client service targets increased to 75% by 2016. According to a study by Neumark & Wascher (2015), they looked at low-wage employees in American hospitals and found out that the customer service and turnover were terrible. From the research, it is evident that increasing wages leads to more productivity and less turnover. Also, the study revealed that minimum wage increase makes the workers feel that they are respected, thus start to care more and in turn appreciate their employers and customers. The same study by Neumark & Wascher (2015) on the impact of higher minimum wage on employee behavior in New Jersey, revealed that increased wages lead to increase in productivity. This shows that salary increment enhances the performance of workers, thus increasing their productivity.
As a result, employees alleviate their recent stress and feel more secure about the future. In turn, they feel more satisfied, leading to an increase in their performance. Moreover, the workers will not have to worry about financial problems; this will put more concentration in work (Nyberg et al., 2016). Additionally, when the minimum wage or workers such as receptionists and representatives, they help improve the company brand since they interact directly with customers thus the face of the company.
Conclusion
In summary, the minimum wage was first introduced mainly to set a balance between low and high wage workers, men and women. Consequently, laws such as the Fair Labor Standards Act of 1983, were established to increase the minimum wage for workers in both informal and formal sector. However, the increase of minimum wages for workers has certain positive and negative impact on workers. These include increased productivity, job satisfaction, reduction of poverty and increased unemployment respectively. These effects depend on particular dynamics in different countries, for instance, in a developing country, an increase in the minimum wage leads to a reduction in poverty for formal workers. Nonetheless, in the same economy, not much impact is felt by informal workers. Moreover, from the evidence discussed above, it is evident that an increase in minimum wage most likely leads to increased unemployment as workers are laid off to reduce production costs.
References
Grimshaw, D., Bosch, G., & Rubery, J. (2014). Minimum wages and collective bargaining: What types of pay bargaining can foster positive pay equity outcomes? British Journal of Industrial Relations , 52 (3), 470-498.
Kapelyuk, S. (2015). The effect of minimum wage on poverty. Economics of transition , 23 (2), 389-423.
MaCurdy, T. (2015). How effective is the minimum wage at supporting the poor?. Journal of Political Economy , 123 (2), 497-545.
Meer, J., & West, J. (2015). Effects of the minimum wage on employment dynamics. Journal of Human Resources .
Neumark, D., & Wascher, W. (2015). The effects of minimum wages on employment. FRBSF Economic Letter , 2015 , 37.
Nyberg, A. J., Pieper, J. R., & Trevor, C. O. (2016). Pay-for-performance’s effect on future employee performance: Integrating psychological and economic principles toward a contingency perspective. Journal of Management , 42 (7), 1753-1783.
