A minimum wage is the lowest hourly, daily, or monthly wage that employers are legally required to pay to their employees. The debate over a minimum wage in the United States has been going on for over 100 years. It is a hot topic in labor, human interest, and especially in economics. Is the minimum wage too low? Is it too high? Should we have one at all? Does having a minimum legal wage help those whom it is intended to help, or does it actually make them worse off? These questions are asked daily by interested parties. While there may not be one definitive correct answer, there are compelling arguments on both sides of the issue, and those who represent their "side" are very passionate about their opinions. This is one of a few social topics about which people are generally not indifferent. Much of the adult workforce in the United States has worked a minimum-wage job at some point in their career, so most people can easily relate to the challenges that face today's minimum-wage workers.
The concept of a minimum wage was first introduced by the federal government in 1938 when it imposed the first minimum wage. The effects of this policy have been widespread with every state imposing their own minimum wages. Essentially, employers are obligated to pay wages to the employees per contract of employment for the work done. Such payment is required to be made on a working day during the working hours, so that the employer is held liable for failure to pay the wages to the employees. Minimum wage, therefore, refers to the lowest wages that an employee is entitled to earn as established by the law. Thus, the laws prevent employers from paying wages lower than those mandated by the law. There are many arguments for and against the imposition of minimum wages. The arguments are based on the research available depending on the side of the divide the person stands on. The proponents of the minimum wage requirement argue that it is necessary as a guardian of the purchasing power of the lowest-paid workers. This is what has eventually resulted in the concept of the living wages, referring to the right of the workers to be paid wages that will allow them to afford the goods in the market. The opponents of the minimum, wages on the other hand, argue that minimum wages stifle job opportunities for low-skilled workers, youths, and minority groups. They argue that the concept of minimum wages has the irony of wanting to help such groups, while the impact is the opposite. Therefore, they state that, when the government imposes a certain price on businesses, these businesses make adjustments in order to cater for the new costs. The adjustments may include things such as reducing hiring, cutting employee working hours, or charging higher prices (Neumark & Wascher, 2007).
History of the Debate on the Minimum Wage
The issue of minimum wages today remains deeply contentious as it brings about moral considerations. The issues of concern are the amount that represents minimum and fair compensation in a given economy and the role of a minimum wage in ensuring that people earn enough to sustain themselves and their families. In analyzing the effects of raising the minimum employment wage, both sides of the divide have to be taken into account. The debates on the question of minimum wages have a long history dating back to the early 1900s and were primarily based on theoretical reasoning.
During these debates, the different theories were classed into two broad categories depending on the theories they presented. There was the neoclassical school of thought and the progressive school of thought. The main theorists in the neoclassical school of thought were John Bates and Frank Tausig, who basically argued that the main determinant of wage levels in any country was the rate of productivity of the employees (Neumark & Wascher,, 2008). These theorists, therefore, were against the imposition of a minimum wage as it stifled the employment opportunities of the low-skilled workers. The progressives, on the other hand, held a contrary view strongly arguing for the imposition of minimum wages. This school of thought was mainly represented by Rogers Seager and Sidney Webb who argued that having minimum wages was important for the growth and development of any economy. They stated that minimum wages were necessary in order to curb the excessive exploitation of low-skilled workers. They also argued that most or all employers had superior bargaining power over their employees when it came to the question of wages, thus, setting a minimum wage was aimed at regulating this power and providing favorable employment opportunities to employees.
The imposition of the first minimum wage by the Federal government gave rise to a new group of theorists who argued for and against minimum wages. The schools of thought that came up during this time were the 'marginalist' school of economists and 'instutionalist' school of economists. The 'marginalist' school had its main proponent in George Stigler, who shared the opinion and theory of the neoclassical school of thought. This school believed that establishing a minimum wage would have the impact of reducing employment, hence, hurting the very people that it intended to help. The 'institutionalist' school had its main proponent in Richard Lester and argued for the existence of a minimum wage (George, 1946). He had the view that the most important factor in determining employment was the rate of product demand and the existence of wage rates, so that the main determinant factor to be considered when setting wages was fairness. He, therefore, argued that minimum wages played very little role in determining the rate of product demand.
The history of the debate on the minimum wage would be incomplete if the contribution of the economists and statisticians was to be left out. A number of economists and labour bureaus carried out research on the effects of having a minimum wage. These studies were carried out on different sectors and dimensions of the economy. The earliest study by economists on the effects of minimum wage was carried out by the Bureau of Labour Statistics (BLS) in 1915. It carried out a comparative study on the impact that a minimum wage introduced in 1913 by one of the US states would have on women. It relied on statistics on employment by age and sex and, thus, compared the changes in the employment of women and men. The BLS study arrived at a conclusion that minimum wages had a disemployment effect on women and the insignificant effect on the employment of men. Therefore, the study was simply stating that minimum wages had a positive effect on wages and little or no effect on women's employment.
The debates on the issue of having a minimum wage fizzled out for some time, but resurfaced again in the early 1990s. It was a reaction on the findings of the studies released by the Labour Bureau. The studies addressed the effects of minimum wages on employment and the overall impact on the economy of a state. These studies presented diverse findings that included the effects of minimum wages on disemployment level and product demand. They highlighted the need to come up with a way of confidently pointing out employment effects of imposing minimum wages (Kosters, 1996). The studies emphasized the need to have both a sufficiently sharp focus on potentially affected workers and the construction of valid counterfactual "control group". The control group was important in order to account for the other influences on the employment of the potentially affected workers with the imposition of a minimum wage. These studies were a precursor to the later debates that moved away from theoretical reasoning and relied rather on more evidenced reports and analysis regarding the effects of minimum wages.
How It Works
The Arguments Against Raising the Minimum Wage
The overriding argument against raising the minimum wage among the economists is that it will have the impact of stifling employment opportunities for the low-skilled employees and, thereby, result in increased unemployment. Essentially, the argument is that most businesses and employers will not be willing to pay employees the wages that are higher than their productivity levels. Consequently, if companies are forced to pay certain wage levels to their employees, they face the very real possibility of going into bankruptcy. It is simply because companies usually pay their employees depending on their productivity; thus, no matter how much a company cherishes social responsibility, it will not be willing to undertake such a risk. This is hinged on the basic principle among employers that one will only demand labor as long as its marginal productivity is greater that the wage divided by prices. Therefore, if the price of labor is above equilibrium, this will create unemployment for those who have low skills. Most employers usually consider low-skilled employees not productive enough and, thus, easily dispensable. The most affected are usually the youth, the immigrants, and other minority groups.
Secondly, there is an argument that having minimum wages ultimately injures the economy in a sense that it is likely to scare away the willing investors from investing in the economy. When the law sets a certain price as the minimum wage at which businesses may provide employment, many employers may view it costly to conduct their business in the country and, thereby, opting for another country. Alternatively, employers may be encouraged to look abroad for labor, which results in an even higher employment rate in the country. The impact this may have on the economy is not negligible as it strikes the economic growth. Similarly, where there is a legally set minimum wage, employers may choose to automate jobs and cut down the increasing cost of having human capital. This has been the practice in most companies, which have resorted to a less expensive substitute, such as using automated check-out counters at supermarkets, self-services at cafeteria and filling stations, and teller machines at banks.
According to Robert, the effect of raising the minimum wage is basically providing compulsory unemployment. Indeed, the law as it is makes it illegal for anyone to hire workers at a rate of less than $ 5.5 per hour. He argues that such a law outlaws a large number of free and voluntary wage contracts. It is this argument that has brought the opposition that having minimum wages goes against the contractual principle of free will of the contracting parties (Swidinsky, 1980). This, according to the opponents of minimum wages, goes against the concept of civil liberty. However, the argument of civil liberty is one that falls on both sides of the divide, though at the Supreme Court case of Adkins v. Children Hospital the judges argued that the law on minimum wages was ideally like fixing prices and it was a representation of unreasonable infringement of the freedom of an individual to decide the price at which they could sell their services (Mortensen, Pissarides, Tatsiramos & Zimmermann, 2011).
Another reason against raising minimum wages is that it affects the rate of workers compensation by the employers, as most businesses have adopted the policy of providing other compensatory measures besides offering salaries. These are offered under the principle of fringe benefits that include paid vacations, basic insurance covers, minimum child care, and continued training for the workers. This means that when employers are forced to pay certain salaries at the minimum wage, they may decide to cancel other compensatory measures that they offered to their employees. They will then cut benefits by adopting other measures, such as paying high salaries to temporary workers (Neumark & Wascher,, 2008).
Arguments for Raising the Minimum Wage
Firstly, having a minimum wage will help alleviate poverty among the poor. The proponents of minimum wages argue that a strong economy is reflected in the ability of a working family to be able to get ahead and cover the basic needs of life. The argument here is that having a minimum wage serves as a great tool to reduce poverty and generate greater social justice in wage distribution. The question of alleviating poverty then resonates with the concept of the living wage. The concept of a living wage closely relates to the minimum wage, however, not much attention has been given to this concept. The ultimate goal of having minimum wage legislation is in order to ensure that salaries are providing a satisfactory standard of living for workers and their families. It is, therefore, clear that both minimum wage and living wage are aimed at enabling individuals to have a sustainable life. The two concepts share similar goals to provide a decent living for workers. However, the concept of a living wage has not garnered much pace due to the fact that there is neither a generally accepted definition of what constitutes a living wage, nor is there a generally agreed methodology on how to measure a living wage.
Secondly, raising the minimum wage will have a positive impact on the economy due to the increased purchasing power of workers. This argument is based on the fact that when more people are able to have enough money to afford their needs, the rate of purchases will increase, thus, boosting the economic growth. The proponents of this view argue that when the citizens of a country cannot rely on the salaries they get and when such salaries are so little that they cannot enable people to have the power to purchase whatever they need, the economy of such country may take much longer to grow. The concept surrounding minimum wages is not just about the rate of income inequality in the country, but rather about a select class of elitists who have hijacked the economy and controlled its growth rate. Therefore, there is a need to bridge the gap between real wages and consumption, thereby, reconciling the difference between productivity and real wages (Flinn, 2011). In this context then, if a worker's productivity is increasing while the wages are lagging behind, the gap between real wages and consumption will still remain stifling the economic growth.
The third positive effect of raising the minimum wage of workers in the country is centered on the argument that it will result in the increase in job creation. It is premised on the argument that low wages inhibit the spending power of the workers and lessen the demand for the goods and services provided in the country, which hinders job creation in other sectors. However, when there is a raise in minimum wages, more and more people are able and willing to spend more in order to get the best goods and services. This stimulates the creation of job opportunities in other sectors of the economy. It is because most people who get minimum wages fall in different categories of classification, such as gender, race, age, ethnicity, the level of education, the number of hours worked, and the size and composition of the family. Therefore, when such groups of people are given wage increases, they are likely going to add value to their lives. For instance, those who have low job qualifications will go back to school, while those with large families will be able to provide their children with better education. This advancement will result in the creation of more job opportunities (Waltman, 2000).
The arguments for and against raising the minimum wage present valid points that policy makers need to consider when making the policies concerning raising the minimum wage. The tide indeed seems to be with those who oppose the increase of minimum wages as they raise vital questions related to the potential economic impact such a move may have vis-?-vis the positive outcomes. The arguments against raising the minimum wage strike at the heart of the general well-being of the entire state of the economy, while those for imposition of a minimum wage are centered towards the recognition that human beings are entitled to have decent living conditions. There is no likelihood of a consensus on these issues and, therefore, a middle ground should be achieved in order to determine the way forward.
In regards to the imposition of a minimum wage, policy developers and law makers should do so in such a manner that meets the established standards of a just and fair society. This then essentially means that people who are employed to work full-time and throughout the year should never find themselves in a state of poverty and destitution. Thus, a free and just society should ensure that everyone is properly rewarded according to his or her productivity level. However, this should be done with the full recognition of the impact of raising minimum wages on those who are unemployed (Kosters, 1996). As argued earlier, raising minimum wages does not favor those who are unemployed, but instead acts to block them out of employment completely. Therefore, the imposition of a minimum wage should only serve as the tool that complements many other tools in the continued fight against poverty and inequality. In this regard, the other tools that should be employed together with minimum wages when fighting poverty should include tax benefits, providing employment insurance, and proper social assistance. It is based on the common belief that minimum wages act as only one of the many policy instruments that are used in raising the minimum floor for low-income earners. It is used to bring low-income workers to a level where they can afford the basic commodities and, thus, are not simply used.
In the same light, attention should be paid to the importance of having a free market which is uninhibited by price controls and wage regulations. Such a market is capable of producing competitive wages, while at the same time improving the working environment. This is based on the argument that some people value other things as much as, or even more than, wages. These things may include congenial working conditions, security, and other special benefits. Consequently, a free labor market represents an avenue of possibilities allowing each individual to achieve his or her potential. Therefore, the debate on raising the minimum wage is not over, but what needs to be realized is that every human being must be given the chance to have good living conditions.
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