Question

In 1000 words or more (2-3 pages) :

Please explain the positive and negative effects of raising minimum wage to $15 an hour.  Include citations at the end of your paper.

Answer 1

Positives effects of raising minimum wages

The primary argument advanced in favor of raising the minimum wage is that higher earnings would improve the overall standard of living for minimum wage workers by providing them with a more appropriate income level to handle cost of living increases. A 2019 Congressional Budget Office (CBO) report projected significant standard of living benefits for at least 17 million people, assuming a minimum hourly wage of $15 by 2025, including an estimated 1.3 million people being elevated above the poverty line.

While some proponents of raising the minimum wage estimate that a much larger number of individuals and families will move out of poverty if they earned more money, a related potential benefit is a projected reduction in the need for federal and state government expenditures on financial aid for poor and low-income individuals.

Meanwhile, an intangible benefit that could translate into tangible benefits for both companies and employees is improved employee morale resulting from higher wages. Business owners frequently note the challenge of providing sufficient encouragement to spur workers to put maximum effort into their job duties, and that this is particularly problematic with low-wage workers who feel that their job efforts aren't keeping them out of poverty.

Increasing employee morale could easily translate into more tangible benefits, such as increased employee retention and reduced hiring and training costs. Employees who are more inclined to stay with a company longer could benefit from greater advancement and from an overall reduction in job-related relocation expenses.

A boost to economic growth is another potential advantage of increasing the minimum wage, as consumer spending typically increases along with wages. A higher minimum wage would put more discretionary dollars in the pockets of millions of workers, money that would then flow to retailers and other businesses. Following points are explained below.

Employment effects negligible- Free market economists, like M.Friednam feared the introduction of a minimum wage would cause unemployment because in competitive labour markets higher wages lead to less demand. However, there is significant evidence to dispute this. Since 2010, the UK minimum wage has increased far above the inflation rate – from £5.93 to £8.21 (27% increase).

Counterbalance to monopoly- In the real world, labour markets are not perfectly competitive. Employers have a significant degree of monopoly power. This means they are able to pay wages below the equilibrium and take a higher share of profit. This is why increasing the minimum wage is compatible with the empirical evidence of no or little fall in employment.

Productivity increases- A rise in the minimum wage creates an incentive for firms to invest in automation and increased labour productivity. (For example, a switch to self-service tills, increased self-service at restaurants.) This investment will help increase overall productivity in the economy and enable firms to be able to afford the wage increases. It shifts the economy to be less labour-intensive. There is some empirical evidence that an increase in the minimum wage leads to fewer hours worked as firms seek to get a greater return from labour. Productivity growth is a key factor in determining the long-run rate of economic growth.

Reduces labour market turnover- A higher minimum wage reduces labour market turnover. Workers have a greater incentive to stay in a job where they get better paid. Similarly, firms have more incentive to train higher-paid workers. Lower labour market turnover helps to reduce the costs of firms.

Reducing in-work poverty- In recent decades, we have seen low wage growth, yet living costs, especially rent has been rising above inflation. This has led to a squeeze on living standards for those on the lower-income spectrum. Many western economies have also seen a growth in inequality with the gap between high-income earners and low-income earners growing. One study in California found that:

Other positive points are illustrated below-

· Raising the minimum wage on a regular basis helps families keep up with price inflation.

· Putting more money in the hands of people who will readily spend it helps the economy.

· Increased wages and spending raise demand and create more jobs.

· Workers stay with employers longer (instead of seeking out better-paying work with other companies) reducing businesses’ turnover, hiring, and training costs.

· Lower unemployment and higher wages increase tax revenues.

· When workers earn higher wages, they rely less on governmental “safety net” programs.

Negative effects of raising minimum wages

Among the disadvantages of increasing the minimum wage is the probable consequence of businesses increasing prices, thus fueling inflation. Opponents argue that raising the minimum wage would likely result in wages and salaries increasing across the board, thereby substantially increasing operating expenses for companies that would then increase the prices of products and services to cover their increased labor costs. Increased prices mean a general increase in the cost of living that could essentially negate any advantage gained by workers having more dollars in their pockets.

Another projected problem resulting from an increased minimum wage is that of potential job losses. Many economists and business executives who point out that labor is a major cost of doing business argues that businesses will be forced to cut jobs to maintain profitability. The 2019 CBO report estimates that raising the minimum wage to $15 an hour by 2025 would result in the loss of approximately 1.3 million jobs. The numbers could be substantially higher if companies made a major move toward outsourcing more jobs to less expensive labor markets outside the country.

One potentially negative impact that is less readily apparent is the possibility that a higher minimum wage would result in increased labor market competition for minimum wage jobs. The net outcome of an increased minimum wage might be a large number of overqualified workers taking minimum wage positions that would ordinarily go to young or otherwise inexperienced workers. This could impede younger, less experienced entrants to the job market from obtaining work and gaining experience to move their careers forward.

Some points are explained below.

Negative employment effects- Previous increases in the minimum wage have been mostly absorbed by the economy without significant negative impacts on employment. However, there is a tipping point at which increases in the minimum wage will have a negative effect on employment. In particular, if minimum wages are increased over 60% of median wages, there is a concern that at this level, firms will not be able to absorb all wage increases through price increases and productivity gains, and therefore employment will fall.

Higher prices- An effect of higher minimum wages is that firms respond to an increase in costs by passing some of the costs onto consumers. Restaurant prices in California have increased as a result of the rise in the minimum wage. A study looked at the effects of a 25% minimum wage increase in 2013 in the area of San Jose, California.

Biggest costs in poor areas- A nationwide minimum wage will have a greater impact on poor areas – regions of high unemployment and low wages. The problem is that a national minimum wage suitable for London may be unsuitable for a more impoverished area in the north. The effect on unemployment can be greater in the poorest areas.

Lack of flexibility- In a recession, demand for labour falls and there is downward pressure on wages. It is in these moments when the negative effects of a minimum wage on employment are greatest and the costs of a minimum wage highest.

Other negative points are illustrated below-

· Employers with tight budgets may lay off employees to remain solvent. Some employees would make more, but others would have to seek other employment – stressing the unemployment system.

· Companies may pass on the cost of increased wages to consumers, in the form of price increases (the “scale effect”). This would raise the cost of living and create a need for further minimum wage increases.

· Businesses may freeze new hires, limiting opportunities for recent college graduates and others entering (or re-entering) the job market.

· Corporations may outsource more jobs to countries with lower (or non-existent) minimum wage standards.

Citations- https://journalistsresource.org

https://www.investopedia.com

https://toggl.com

https://www.economicshelp.org/