The minimum wage was first introduced in New Zealand in the year 1894 through mandatory negotiation. At this moment, the minimum wage has become a fraction of the social legislation in nearly all nations. Even though the United States was the first to carry out laws of federal minimum wage, a fight that was strong conducted by organized labor for enactment terminated in the year 1938 the channel of the fair labor standards act which put .25 per hour as the wage for those who worked in interstate commerce. Industry committees were set up by the Act to calculate rates for each industry. There has been subsequent raise of the wage through the decades.
Economic aspect of minimum wage
The minimum wage tries to protect workers from exploitation. It thus gives them a chance to acquire the fundamental needs of life. The minimum wages differ depending on the country and in some cases it also fluctuates between provinces or states.
The economic aspect of laws for minimum wage is quite simple. Many employers dont pay wages that exceed the value of overtime. A raise in minimum wages results to dismissal of low productivity workers by their employers. Those with least job experience, education and maturity suffer most from this policy. As a consequence the laws for minimum wages are expected to affect teenagers as well as those with less education.
Eradication of laws of minimum wage would lead to reduction in joblessness and raise the effectiveness of markets for labor of low productivity. There are some economists who have been advocating for minimum wages that are higher. Some of them have the common ideological learning.
Economists who have a link with the Institute of Left oriented Economic policy as well as the Clinton administration have linked a normal for increases in minimum wage. As far as this economists are concerned higher wages motivate employees and thus higher work efficiency. Due to this, employees will require a minimum wage once their bosses are forced to make the payments.
If this statement was true then employers could exploit the workers who are less educated and experienced to maximize their profits. They would be willing to pay higher wages without minimum wage legislation. Besides, those economists who came up with this notion claim to have tangible evidence that supports their ideology.
There has been a publication made by economists Alan Krueger and David Card on analysis of the fast food industry. Their study reveals that minimal increases in minimum wage would only lead to minor losses in jobs and might raise employment slightly in some cases. This Krueger and Card studies indicate only that a minor increase in minimum wage might not lead to significant unemployment. The studies also overlook the fact that the present rates of minimum wages are already leading to noteworthy unemployment for many.
The aspect of economy concerning minimum wage increases has been a major concern with the public as well as professional views. A few of economists studying free market like Landsburg have approved that a raise in minimum wages do not affect employment much. Landsburg says that those who criticize laws of minimum wage insist that they lack appropriate impact on teens and blacks. He goes ahead to dismiss these claims because minimum wages have insignificant effect on unemployment. Minimum wages only eradicates fewer jobs. He insists the ancient argument that minimum wages are not good for minimum wage workers cannot be maintained.
Statistics that are real reveal that those who criticize laws for minimum wage were right all along. A part from the fact that minimum wages do not lead to higher levels of unemployment, they have an adverse effect on ethnic minorities and teenagers. As far as Bureau of Labor Statistics is concerned the rate of unemployment for each individual above sixteen years was 5.5 percent in the year 2005. For those who fell in the age bracket of 16-19 years had an unemployment rate of 17.2 percent.
The unemployment rate for those aged 16-17 years was 19.6 percent while it was15.7 percent for those aged between 18 and 19 years. The ethnic minorities are the ones who are affected most by minimum wage as compared to others. The rate of unemployment for white teens in the age bracket of 16-17 years was17.2 percent in the year 2005. While their Hispanic and Black colleagues had unemployment rates of 24.9 percent and 40.8 percent respectively.
These figures of course reduce for older minorities. Blacks who fall in the age bracket of18-19 and 20-24 years had unemployment rates of 25.6 percent and 19.8 percent respectively in the year 2005. The unemployment for Hispanics was a bit lower 17.7 percent for those aged 18-19 and 9.5 percent for those aged between 20 and 24.
Landsburg maintains that a good number of the jobs lost are miserable jobs that teens will not miss.
According to DeLong, laws of minimum wage can assist in reducing poverty. This is because employees who maintain their works at minimum wage benefit a lot and at the same time those who are not employed lose little. The problem associated with this argument is that it comprises negotiable value judgments. As far as the theory of mainstream economy is concerned, economic efficiency is achieved when markets clear because this is how all profits from trade are recognized.
With unemployment of the teens doubling to 40.8 percent, it is clear that some markets of labor are not clearing. If such degrees of unemployment are brought by labor market limitations, economics like Krueger, Delong as well as Card would advocate for governments to get involved and rectify these failures of markets. Yet they consider double teen joblessness comfortable when it emerges as a result of government intervention. This is because they want to utilize policies of this kind to reorganize income.
The theory of mainstream economy lacks any fundamentals for judging the impact of economic reorganization. As far as economics of textbook is concerned, the highest degrees of economic effectiveness are attained when markets clear. At this time, maximum gains for jointly advantageous trade are realized. Other people gain from income transfers at others expense.
There are no scientific techniques used by scientists in doing comparisons between profits and losses that comes as a result of income transfers. At the moment economists deviate from analyzing the effectiveness conditions and embark on talks about redistribution of income, they become forerunners of a political agenda instead of objective scientists.
The unemployment that results due to laws of minimum wage is not considered significant as far as Landsburg or DeLong, are considered. But these losses of jobs are significant to the employers as well as the workers affected by these laws. The ideas of few scrupulous economists should not matter most than the interests of workers and employers because these jobs might be miserable jobs. But other individuals also argue that these jobs are of significance importance as they form the fist step in getting experience on job and familiarizing with adult responsibility.
Another trouble associated with minimum wage is that they also affect older workers. As noted earlier, employees who fall in the age bracket of 20-24 years are likely to be affected by laws of minimum wage. Rates of joblessness in the age bracket of 25-34 years are higher as compared to those for the age bracket of 35-44 years.
The rate of joblessness for Hispanics and blacks aged between 25 and 35 years were 5.7 percent and 11 percent respectively in the year 2005. The rates for whites and Asians in this age group who were unemployed were 4.3 and 3.4 respectively. The unemployment rates in the age bracket of 35-44 years for blacks, Hispanics, whites and Asians were 7.1 percent, 5 percent, 4.3 percent and 2.6 percent respectively.
The black to Asian joblessness is revealing. For this reason, the laws of minimum wage are of little significance to Asian Americans. As a consequence, the Asians can afford to achieve unemployment which falls in the range of 2 to 3 percent. For the Asians with 16 years and above, they had a rate of unemployment which was 3.2 percent in the year 2005.
Those Asians who fall in the age bracket of 20-24 years, had unemployment rate of 5 percent in 2005. These figures only constitute a portion of joblessness experienced by blacks in the same year. The Hispanic white as well as black Americans have no reason of not attaining the 2-3 percent range of unemployment as the Asians.
Minimum wage advocators
Those who support laws of minimum wage do not recognize that the rate of unemployment nationally did not fall beyond 5 percent before the minimum wage laws were implemented. As far as the United States census is concerned, the rates of unemployment nationally were3.2 percent, 3.1 percent, 2.4 percent, 1.3 percent, 2.7 percent,1.6 percent and 3.6 percent in 1927, 1926, 1925, 1923, 1919, 1918, 1907, 1906 and 1902 respectively.
In the present day, there are some states that have low employment rates like 3 percent. For instance, the state of Virginia in the present day has rate of unemployment of 3.1 percent. The state of Wyoming has rate of unemployment of 2.9 percent while Hawaii consist of 2.6 percent unemployment rate.
The rates of unemployment nationally rarely reduce beyond 5 percent because some classes of employees remain within double digit unemployment. Considering these figures, one can argue that laws of minimum wage increases the national rate of unemployment by three percent.
According to economist Okun the gross domestic product falls by 2.6-3 percent for every 1 percent increase in joblessness. If the minimum wage laws can raise the rate of unemployment by three percent, then minimum wage losses are significant. Since the law of Okun is an experimental suggestion, its not real certainly. Elimination of minimum wage might not necessarily improve the GDP contrary to the way this law suggests.
Nonetheless, doing away with laws of minimum wage would have a certain positive impact on the GDP. The data available as well as economic theory show that laws of minimum wage leads to inefficiency in the economy. The living wage implementation would only intensify the losses. There arguments on whether those propose living wage want to witness the rise of rates of unemployment within ethic minorities and teens or not.
Economically, the living wage case is unfounded. The minimum wage of today comes up with high levels of joblessness within low productivity workers. Living wages that are higher would only worsen these problems. The claimed moral case for minimum wage overlooks the fact that increases in living wage have an adverse impact to the individuals who are supposed to be assisted by forerunners of living wage.
If sound policies are to be pursued by politicians, they should bear in mind to retract the laws of minimum wage more so considering the teens. Contrary to this, a good number of politicians consider political expediencies most rather than effective economic policy. Due to this, there will be an increment in minimum wage until the time the opinion of the public will change significantly.
Many economists have criticized the minimum wage due to the fact that it creates a price floor on wages. Dead weight loss in an economy can result from price floors. This implies that there is an existence of inefficiencies. In such cases the companies are forced by minimum wages to employ few workers and therefore increase unemployment.
According to Klein and Dompe, regulations of the minimum wage which were endorsed by the federal government set the minimum levels at which employees may be compensated by those who employed them. For owners of small businesses who employ other individuals, might have difficulties when it comes to compensation. Creative reimbursement packages like performance based reimbursement and others are gaining acceptance at a faster rate and thus changes the manner in which employers pay their workers. In many small businesses, the minimum wage remains an ever-present form of compensation.
Minimum wage changes affect approximately eleven million workers in the United States. 90 percent of the minimum wage workers do their jobs within the privatized sector. Inns and restaurants, retail ventures and private households usually pay the minimum wage. Considering the department of labor, more than one third of those likely to be victims of increase in minimum wage are teens who range between 16 and 19 years and part-time employees.
Protection acts for wage bill and small businesses.
There were two legislation pieces passed within the 90s. The pieces affected the manner in which the owners of small businesses compensate their employees of minimum wage. These two Acts that were enacted simultaneously and jointly were Small Business Job Protection Act (SBJA) passed in the year 1996. These acts impacted a much bigger range of aspects rather than simple wages. And this was misleading. For example, SBJA raised the amount a small business can set aside for purchases of equipment from 17,000 to 24,500 in the year 2003.
The bill also gives companies ample time to evade the problem of wrongly considering a contractor as a worker. It also sets free and simplifies procedures of S corporation and gives ample time to owners of small businesses to avail pension as well as plans of retirement for their workers.
As an owner of a small business, it is vital to come up with budgetary adjustments prior to changes in wage. Being familiar with trends of legislation may assist one in maintaining accounting procedures flexible.
It is obvious that some owners of small businesses will be impacted by alterations of minimum to a degree that is same. Some businesses heavily depend on the work force of minimum wage while others rely on employees who make more as compared to the base wage.
Usually, the most important aspect in determination of the wages paid is the industry in which a business runs. Another factor which can also determine this is the geographical location.
There are some economic analysts who insist that there are many merits associated with paying workers above the minimum wage. Considering a recent survey carried out by National Small Business United on small businesses, structures that pay above the minimum wage have advantages which include
The federal government controlled base wage fluctuations will not affect a business that pays higher than minimum wage as compared to a business that tightly holds to paying a minimum wage.
Higher wages paying employers have good options for new hires. Salaries that are higher imply better people because most people will find open position(s) more attractive.
Salaries that are competitive eradicates turnover. The workers become less tempted by other workers because they earn better salaries as they would anywhere. A work force that is stable leads to higher productivity.
Minimum wage goals
Even though minimum wage goals are accepted widely as proper, there is a big disagreement as to whether these wages are efficient in achieving their goals. Since they were introduced, laws of minimum wage have received minimal support from analysts of economy as compared to the general public. Debates about gains and cost of minimum wage are underway until today despite the economic research that has been conducted in decades.
Stigler, provided the classic clarification of weaknesses of minimum wages in decreasing poverty. According to him, employment may decrease much as compared increase in wage therefore decreasing overall income. As workers from the covered sectors are absorbed by uncovered sectors, the reduction in wages in sectors that are uncovered may surpass wages increase in covered sectors.
There might be a negative effect on family earnings distribution by minimum wage unless the better jobs that are few are given to needy families members rather than to youths from richer families. The laws which state that an employer is not to pay lower than minimum wage are equitable to laws that restrict employees from working in the sectors that are protected unless employed by those willing to pay them the wage.
Direct experimental studies reveal that effects of anti-poverty in the United States would be quite reserved even without effects of unemployment. Limited workers that earn low wages come from poor families. Teenagers and inexperienced adult females who are part time workers are the ones who are affected by minimum wage primarily.
Minimum wage economics
According to Arrigo and Steedman, a study done by mainstream economics on demand and supply indicate that maintaining a price floor above wage that is equilibrium, the laws of minimum wage brings about unemployment. This is so because a good number of employees are more than ready to work at raised wages while few jobs will be available at the raised wage.
Many introductory economics textbooks show a model which suggests that increase in minimum wage leads to decrement jobs for minimum age employees. These books puts across that it a raised minimum wage increases the rates of wage for workers who lack skills, the number of unskilled employees will reduce. The direct outcome of legislation of minimum wage is mixed.
Some employees more so whose initial wages were close to minimum wage will benefit from higher wages. Others especially those who had least prelegislation wage rates will lose their jobs. They will be forced to get in to the ranks of the unemployed or force that is out of labor.
There is an assumption that employees are work for longer periods as long as they are paid higher wages. The cost of a firm depends directly on wage rate. There is an assumption that higher wage rates will make the employers demand few hours with the employee. This is so because increases in wage rates makes it expensive for firms to employ many workers hence few workers are hired or only hired for few hours.
A combination of labor supply and demand curves allows economists to evaluate the minimum wage. The first assumption that is made is that labor supply and demand curves will not alter due to an increase in minimum wage. If there is no minimum wage, employers and employees will not stop to adjust labor quantity that is supplied in accordance to price until the labor quantity demanded equals the labor quantity supplied, thus the demand and supply curves intersecting at the equilibrium price.
The behavior of minimum wage is like that of labor classical price floor. According to standard theory, that if minimum wage is set to be higher than equilibrium price, the workers will be more prepared to give more labor while the employers will not hence creating labor surplus.
In simple terms, basic economics say that increasing the price of a commodity artificially increases its supply and lessens its demand. The outcome is the surplus of the product. When the product is in surplus for example wheat, the government purchases it. Because the government doesnt employ surplus labor, the surplus labor becomes unemployment, which seems to be higher with laws of minimum wage than without the laws.
Therefore, the basic theory puts across that an increase in minimum wage is beneficial to employees whose wages are increased, and harms individuals who lose their jobs or dont get hired. This is because organizations reduce their employees. On the other hand, those who propose minimum wage insist that the condition is more intricate than the fundamental theory can describe.
One intricate aspect is probable monopsony in the market of labor whereby the employer get power through market and can use this power to determine the wages paid. Therefore it is somehow possible theoretically that employment can be boosted by minimum wage. Even though there are possibilities that market power of a single employer in many markets of labor in the sense of customary company town, information that is asymmetric and poor mobility give some level of wage-setting power to most organizations.
Standard criticism theory
The notion that minimum wages reduce jobs is arrived at basing on the typical mold of demand and supply of the labor market. Most economists argue that the model is incoherent logically even with all its speculations. Basing on simulation results, they argue that little of the experimental work done with the model of the textbook comprises of a test that is potentially falsifying and as a consequence, experimental proof rarely exist for the same model.
Graham, argues that considering somewhat on Sraffianism, the augmented market of labor suppleness policy as well as the decrement of minimum wages does not consist an economic theory argument that is intellectually coherent.
According to Fields, who is a labor and economics at lecturer at University of Cornell, the model of standard textbook for analyzing minimum wage has a lot of ambiguity and the standard theoretical speculations wrongly measures a market of one sector only. According to Fields, a market of two sectors where the service workers who are self employed as well as workers of the farm are excluded from the coverage of minimum wage. One sector market with a coverage of minimum wage and another without (and probable mobility within the two) is the backbone of good analysis.
Fields, illustrates through his model that the emblematic theoretical argument is full of ambiguity and puts across that prophecies derived from the model of the textbook explicitly does not consider the two sector markets. Basing on the fact that since a sector that is non-covered exist almost every where, the prophecies of the model of the textbook cannot depended on.
There is another view of labor market which has labor markets that have low wage. These markets are perceived as having monopolistic competition. This is where employersbuyers have market power that is significant as compared to employeessellers. This monopsony could be brought by international collusion among buyers or natural factors like segmented markets, costs of information, poor mobility and the personal aspect of markets of labor.
In such case, demand and supply curves would not derive the labor clearing quantity and wage rate. This is due to the fact that as upward sloping supply would remain constant, other than making use of the downward demand curve monopolistic buyers would make use of the curve that is steeply sloping downwards which corresponds to expenditures that are marginal.
Such cases are forms of market failure that leads to a low pay to workers who get little compared to their marginal value. Regarding monopsonistic speculation, a suitably set minimum wage could raise both wages as well as jobs with the finest level being equitable to the labor marginal productivity. This observation illustrates the work of minimum wages as a policy of market regulation analogous to policies of antitrust.
Another factor why employment in certain organizations may not be affected by minimum wage is that the product produced by employees has a highly elastic demand. For instance, if wages are increased by force the management can set higher prices for commodities on the market so as to meet the high wages that its supposed to pay to the employees. Because the products demand has high elasticity, consumers will carry on with buying of the product at hiked prices and as a result the manager will not be forced to lay off employees.
Krugman, suggested three other probable reasons to show that minimum wages do not affect employment wages that are high may decrease turnover and consequently costs for training increasing minimum wage may reduce the complexity of hiring employees at a wage that is higher as compared to the current employees and employees of minimum wage might correspond to such a small fraction of the cost of a business. He says that he is not sure with the correctness of this and argues that that one can welcome the new experimental findings.
From many studies carried out by economists many have different views concerning the impact of minimum wage on the economy. Even though a few of economic analysts say that increase minimum wage improves the economy, the benefits associated with these are minimal as compared to the negatives that can be brought about by minimum wage increment. Increase in minimum wage results to significant job loss and also the employers will be forced to hire workers for few hours due to this. Therefore the laws of minimum wage should not be encouraged.