New Zealand was one of the first countries to introduce and enact laws that govern minimum wage. In Victoria Australia Minimum wage was forced upon six different companies that paid low wages when the Factories Act was amended to allow establishment of the wages board in 1896. A universal standard minimum wage was not set. In 1 909 Britain President Winston Churchill introduced and enacted Trade Board Act. In 1938 America introduced minimum wage Statutory. In some states they were enacted as proactive laws since 1912 which were later ruled out to be illegal.
Many countries have since set a minimum wage although, in countries such as Italy, Germany and Austria they are dependent on the trade unions and employer roofs to set the minimum wage for them. In United States, there are several states that have set their own minimum wage considerably above that of the federal government. What is Minimum Wage? “Minimum-wage legislation exists in every province and territory as part of employment standards legislation. The minimum wage is the lowest pay rate employers can pay employees covered by the legislation” (Minimum Wage, 2010).
Before and during the Great Depression of the sass’s, workers were exploited and forced to work in unfit conditions for next to nothing in order to try to put food on the table for their family. There had been attempts by the Labor Union prior to this time period, to mandate some sort of uniformity with no success as they were described as being unconstitutional according the Supreme Court of the United States. If such a mandate had been placed it was said that the individual’s would no longer have the ability to set their own prices for their work.
This issue still allowed employers to manipulate and misuse their employees throughout the entire period of the Great Depression. Poverty had become a major issue across the nation during this time and the focus on the Presidential re-election in 1936 and Franklin D. Roosevelt had promised the American people that he would protect them, which won him the election. In early 1 938, President Roosevelt signed into law the Fair Labor Standards Act (FALLS) and Congress mandated a minimum wage. When the minimum wage was initially set it was 25 cents per hour and was set with the intentions to maintain a minimum standard of living for workers.
With these facts in mind this paper seeks to discuss the Economic impact Of increasing minimum Wage. The paper will analyze the impacts to the employees, employer, consumer and the economy. It will identify and issues the advantages and disadvantages, as well as discuss whether it propels the economy or not. Impact on the employees With increase in minimum wage the employee living standard is improved. This is a result of an extra dollar that may be used their needs, for instance one can purchase more groceries compared to what he could purchase prior to the increase.
Increasing minimum wage is also a form of motivation to the unskilled workers who are job hunting. An individual’s morale who is searching for a job may increase due to they will be earning a larger sum and this in turn can build self-esteem. Some economists have argued that raising he minimum wage would increase the amount of spending in the economy hence a boom in the business creating more employment opportunities. On the Negative side, some companies may be forced to cut some of its employees due to the increased cost of operation as a result of increased minimum wage.
Also, it creates a barrier for new entries in the labor market to work. The Employers may not be interested in hiring more workers in order to cut and minimize the operations cost (Hoffman et al 2009, p. 36). As much as increasing the minimum wage is a gateway of reducing poverty it inevitably affects the employee negatively. As a result of increase in minimum wages industries struggle to recover this cost through increasing the price of its products. At the end of the day the employee will still meet with higher prices in the market than it was prior to the increase in minimum wage.
A higher minimum wage will cause competition for the wage jobs by the professionals which in turn will knock the unskilled labor force out Of the equation all together. Impact on Employers As a result of increase in minimum wage to the employee, the employer would see an increase in marginal productivity resulting from greater motivation from the employees. Also, the employer would benefit due to naturalization of the labor market wage prices which would deprive its competitive employees hence a constant training cost (Hoffman et. L, 2009, p. 48). With increased minimum wage the competition in payment of minimum wage by the companies is reduced. On the negative side increase in minimum wages causes an increase in the operation cost of the employer. The employers may be forced to lay off some of its workforce to accommodate a tighter budget (Waltham 2000, 131). This may have an effect on productivity levels of the company. It will result in an increase in work ours by the retained employees, which may affect productivity negatively.
An increased minimum wage may cause demutualization of other employees who are not affected by it, yet their earnings would be slightly higher than the minimum wage. Lastly, a higher minimum wage would not allow the growth of small businesses due to their revenue would be overcome by the expenses leaving no room for future investment. Consumer Effects Increase in Minimum wage is anticipated to boost the consumers spending due to an extra amount available for spending. This is only possible if the industries do not transfer that cost to the consumer by hiking the prices.
The producers would seek to recover the increased cost of operation as a result of a higher minimum wage by increasing the prices of the commodities in the market to increase its income to make up for it. This would mean that the consumers need to dig deeper into their pockets in order to accommodate for the price increase of goods. This means that the cost of living would increase the need for a further increase in minimum wage. Economic Effects Raising the minimum wage would translate into more money circulating into the economy due to there is more money to spend by the workers.
This in urn stimulates the economy. The rate of unemployment would be reduced in the economy since a boom in business would result into creation of more employment opportunities. The government would also increase its spending on infrastructure and economic development, since the expenses on social programs would be reduced by an increased minimal wage. People who rely on extra support by the government social programs would support themselves better with an increase in their pay. Also Inflation is directly affected by the raise in minimum wage.
To account for inflation the federal minimum wage needs to be increased. Increase in minimum wage would mean that there is higher spending by workers that leads to greater employment opportunities which in turn balance the inflation effect. On the negative side, increased minimum wage may lead to an increase in dependency ratio especially in the case of lay off by the companies (Waltham 2000, 131). This would in turn increase government spending on social us port programs reducing the government spending on development of the economy.
Also, there may be an increased level of crime due to the layoffs which would discourage investment slowing down the economy. The Economists view point Economists agree that increasing minimum wage addresses the question of inequality and poverty. They believe that an increase in minimum wage would decrease the number of people who live within the poverty level by more than 4 million in the United States. The increase would also further boost the income of the 10th percentile workers.
Given that the policy is self imposing with no administrative cost in challenging market power of the employer it is one of the best policies that the government utilizes. On the topic of inequality, the minimum wage would boost the income of the people earning low wages without affecting the median households. This would bridge the gap between the low income earners and the middle income earners. Also the economists in the past have criticized increasing of minimum wage with claims that it would result into decrease in workers demand (Leonard, 2000, p. 37).
The assumption has been criticized in equal measure by other economist and research conducted in the recent year. For example, there was no impact on jobs as result of the increase in minimum wage in Britain when their wage increase was introduced in 1999. The research has found there are no negative effects that minimum wage has on employment. Comparisons have been made with countries who have increased minimum wage and there have been no negative effects to report. The theory assumes that higher wages would decrease costly turnover which in turn decreases the incentive to cut the jobs of some workers.
Current Economic and Political View Point’s on the Increase of Minimum Wage The President of the United States, Barrack Obama has proposed a rise in minimum wage to 10 dollars up from the current 7. 25 dollars per hour. This proposal has faced numerous challenges and congress has opposed. Some Individual states have increased their minimum wage in their jurisdiction. Minimum wage in developing economies affects the economy negatively; it affects employment directly because the industries would lay off employees.
On the other hand, in developed economies minimum wage has no impact on employment. Therefore, if the situation is handled properly the increase of minimum wage would reduce the level of poverty and promote equality in income earning. Minimum wage draws both economical and political views. The major argument against the minimum wage is that it causes destruction to jobs, harming the same people it was set out to assist. Evidence has shown that this is untrue. Critics predicted a great number of job loss when the United Kingdom enacted its minimum wage bill but, there was no impact.
The experience and research has shifted opinions Of experts on minimum wage debate with few disputing the fact that higher minimum wage destroys jobs. The economists argue that the reason behind why the increase in minimum wage has little impact on employment to be; labor cost do not increase as expected because the level of absenteeism and cost of turnover is reduced. Moreover, increase in wages for the unskilled labor increases work incentives. Minimum wage is of great significance in assisting low paid errors. It raises their income without causing any harm to their jobs, which reduces poverty levels.
Increasing the minimum wage is necessary although, it should be in comparison with the economic growth of the specific country. Most people believe that it’s unrealistic for people to earn less than their efforts in work making it difficult to provide for family. Such a view is common in this day and age especially in economies that living standards are threatened and the connection between people’s welfare and growth seem to separate. These according to economists will adversely cause effects on employment. Minimum wage impacts the economy positively for the most part with a few negative effects that were noted above.
Setting of the minimum wage should consider the economic growth opposed to only the standard of living for it to effectively achieve its intended purpose. All effects should be compared in order to come up with the right minimum wage to set and alleviate a minimum wage that would negatively impact the economy once it is established. Last of all, the increase in minimum wage will generate greater consumption by the increase of the money supply to the lower income levels who are already spending their paycheck in its entirety to make ends meet which in turn will increase the amount of money back into the economy.