Support Live Chat
Economic instability, social disparity, and market fluctuations are the most urgent issues nowadays, and their resolving is the primary objective of the United States. The labor market is one of the most problematic ones, and its state reflects the overall situation in the economy of the country. Interventions and regulations on the labor market can have a significantly positive effect on the efficiency of the entire economic system while bad decisions may be harmful to the economy as well. Setting the minimum wage level is one of the most commonly used methods of regulating the labor market, and an increase in it has both positive and negative impacts on the economic environment of the country. The duality of the impact of an increase in the minimum wage level is hotly debated nowadays because proponents and opponents do not give up proving their points of view, and thus there seems to be no magic solution in the minimum wage issue as none of them is completely correct.
Arguments for an Increase in the Minimum Wage Level
The beginning of the discussion over the increase in the minimum wage level dates as far back as the times of the U.S independence. Becoming the most developed country in the world, the United States had a very strong labor market, which was the driving force of its GDP growth. However, with the development of the economy, social inequality grew, increasing the need in regulations, including unemployment benefits, tax credits, and minimum wages.
Henry Ford was among the first managers to introduce a minimum wage for his employees. He believed that the only way to make people buy his cars was by providing them with sufficient financial resources they could spend on Ford’s products. Thus, the “increased wages --boosting sales and raising worker productivity”, and made significant progress in the science of management. The results of Ford’s innovations were so impressive that later his methods were used for introducing the first minimum-wage laws in the U.S.
The primary argument for setting and increasing minimum wages is the fact that they enhance purchasing power and stimulate the economy. Workers use their wages to consume goods and services, and an increase in their wages will inflate aggregate demand in the economy. As a result, this will stimulate businesses to expand and produce more, thus creating new working positions and reducing the unemployment rate. However, an increase in the minimum wage can also result in a higher unemployment rate as the cost of labor will be higher. This is the primary argument of minimum wages opponents.
Another argument of proponents of the minimum wage increase is the fact that economic inequality is too high, and many people live below the poverty line. Nearly 8 million working Americans “still live below the poverty line”, and partially this is due to the low minimum wages. Consequently, an increase in their level will decrease social disparity and give people a chance for a better life. Though this argument represents one of the major benefits of an increase in the minimum wage, it is usually put under criticism for being just a political method of increasing a candidate’s popularity during elections.
Minimum wage proponents also claim that it is not adjusted for inflation from year to year, and the real minimum wage is much lower now than it used to be in the previous century. The nominal minimum wage in 1956, adjusted for 2013 prices, would be worth $8.56, as well as $10.70 for the minimum wage in 1968. Furthermore, such adjustments do not take into account an increase in workers’ productivity, so the figures should be even higher. The conclusion is that inflation outpaces the growth of minimum wages and people are becoming poorer from year to year.
The gender wage gap is another important argument, used by the proponents of the minimum wages. They claim that in addition to general social inequality there is a strong disparity between the wages of men and women, and the former get much more. As a result, many women would like minimum wages to be increased as this would help them “make ends meet”. However, this argument is usually criticized, because of the scale of gender inequality and discrimination is not very big for low-paid workers, unlike it is for the higher positions. Though an increase in the minimum wage level will obviously help low-paid women, such effect will be dramatically small.
Furthermore, there are other arguments of proponents of the minimum wage increase. First, some researches have proved that higher minimum wages reduce worker turnover, as well as stimulate the productivity of employees. It is obvious that such an impact is very positive for the economy, notably its labor market, as it decreases market fluctuations. However, the outcomes of such researches usually vary, and there is no strong evidence that this argument is completely correct. Second, minimum wage proponents believe that its increase will simply restore the true value of work, which has been strongly depreciated over the years.
However, the positive response of businesses for an intention to increase the minimum wage level is the best indicator for estimating the need for such increase. The widely spread opinion that small businesses do not support a minimum wage increase is wrong as two third of them “believe a minimum wage increase would boost business and help the economy”. They believe that employees, which earn minimum wage, have a very high marginal propensity to consume, and their additional earnings will be spent on goods and services. However, the situation with big companies is completely different. They usually hire employees for the minimum wage, and they have to qualify for food stamps and Medicaid. As a result, government compensations are growing. That is why proponents claim that if the minimum wage level were higher, government compensations would be lower, and this could cut the budget deficit.
Arguments against an Increase in the Minimum Wage Level
As it was mentioned above, there are many contradictions over the minimum wage issue. Each argument of its proponents can be compared with an opposite argument of its opponents due to the dualistic nature of its impact on the national economy. Furthermore, opponents of the minimum wage not only deny its positive impact on the labor market and the entire economy, but they also believe that the elimination of the minimum wage is better for ensuring efficiency. Such opinion represents the neoclassical school of economics, and it includes many arguments against minimum wages.
The primary argument of opponents of the minimum wage is their belief that an increase in its level inflates unemployment and poverty. They claim that such increase boost labor cost and decrease demand for it, and thus companies start cutting working positions, inflating the unemployment rate. Consequently, the increase in the minimum wage level results in higher unemployment and poverty in the economy. However, there are studies that refute the fact that an increase in the minimum wage level really “hurt employment and increase poverty”. For example, evidence-based research did not find out the relationship between the increase in the minimum wage level and increase in the unemployment rate. Such researches deny primary arguments of opponents of the minimum wage increase.
Another argument of minimum wage increase opponents is the fact that most people, who live in poverty, actually do not work, and such an increase will not affect them. As a result, these people will get even lower chances to find a job, and their unemployment will just prolong. Furthermore, a big deal of such people is not able to work, so they need other methods to be applied in order to combat poverty. Furthermore, they claim that such actions will stimulate companies’ job offshoring, which will increase the unemployment rate. However, proponents deny the fact that companies’ offshore jobs will be stimulated, as most of the low-wage works are actually non-tradable, and they cannot be used off-shore.
Some opponents of the minimum wage increase claim that if the minimum wage is increased, low-paid jobs will become prohibitively costly and will be simply automated, and low-paid workers will lose their jobs. However, it is obvious that automation is inevitable, and a direct relation was not proved yet. Every business has an incentive to move to more effective automatic production, and a small increase in the minimum wage level simply cannot be a trigger that would make such a shift.
Another argument is that an increase in the minimum wage will partially create benefits for people, which actually do not need them, while the impact on really poor people will be dramatically small as “most workers earning the minimum wage aren't poor”. Furthermore, if the federal minimum wage were increased from $7.25 an hour to $9.50 an hour only 11.3% of workers getting benefits would belong to people below the poverty line. Nevertheless, such claims do not have clear evidence, and their correctness can be put under question due to drawbacks in their methodologies.
Some opponents claim that it would be better to introduce other methods for combating poverty, such as an increase in earned tax credit. For example, during the high unemployment rate in the U.S. in 2003 there was a decision to “extend unemployment benefits for those workers who were unemployed for six months or more”. However, such actions “would simply perpetuate the cycle of devaluing work”. Increasing earned tax credit will redistribute the income of taxpayers for the sake of poorer, dramatically decreasing economic efficiency, but increasing economic equality. These are actually two trade-offs, and each country has to choose and estimate the measure and preference of each of them. Saltsman (2011) supports this claim and argues that “workers whose wages rise following a minimum wage increase are better off; on the other hand, those who lose their job because they're now more expensive to employ are worse off”.
To sum up, both proponents and opponents of the minimum wage increase have strong arguments for and against such increase respectively. Their arguments are based on two different sides of the minimum wage impact on the economy, and all of them are relatively right. However, the arguments of opponents seem to be relatively weaker as it is impossible to limit interventions to such a small scale. Without them, the economy will fail, and the proper level of a minimum wage will ensure the welfare of the society, as well as sustainable growth of the economy.