Pros and Cons of Increasing the Minimum Wage

Introduction

The minimum wage is the lowest reasonable price that an employer is legally obliged to compensate for work, not including collective agreements and custom employee contracts. The federal and state governments are responsible for setting their minimum wage policies, which may differ. The aspect of wages is a grave concern in the modern world due to the discussion among economic experts, whose opinions differ on whether it should increase or stay stagnant (Kops, 2017). The increase in the minimum wage is regarded as a legislative approach to protect low-income earners against exploitation by employers.

However, government involvement in increasing salaries has violated the laws of supply and demand, which are responsible for setting effective market prices in a competitive market, negatively impacting the economy.

Pros of Increasing the Minimum Wage

The Great Depression was characterized by high unemployment rates of 25%, an opportunity that employers took advantage of to lower wages. As a reaction mechanism, legislators established the minimum wage. The underlying merits of a rise in minimum salary focus on the financial well-being of unskilled and semi-skilled workers, and the reduction of the poverty index. Without established wage restrictions, employers tend to exploit workers by instituting low pay, thus impoverishing them. A few benefits of raising the minimum wage include:

Reduced Poverty

Smith (2015) asserts that poverty is a universal challenge. The United States reported the second highest GDP globally in 1995, but was among the three leading developed countries in poverty rates. The statistics indicate an economically stable country but reveal that a majority of its residents live in abject poverty. Increasing the minimum wage is a step towards bridging the income inequality gap between the wealthy and the poor, and functions as an income distribution scheme. In the years following 1995, America’s minimum wage gap increased considerably, leading to poverty reduction as evidenced by its current ranking of 17 among developed nations. Hence, increasing the minimum wage expands the purchasing power of poor citizens and consequently reduces poverty.

Economic Growth

Raising the minimum wage contributes to the circulation of money in the economy in various ways. The growth is an economic catalyst because minimum wage workers can access more wages. This contributes to their purchasing power on an individual, household, and financial needs basis, thereby facilitating trade. The surged spending generates demand for products and services, which contributes to economic growth. The increased demand rates contribute to the creation or expansion of new businesses, which creates additional employment opportunities, consequently reducing the unemployment gap. A higher employment rate contributes to more tax revenues, which the government can allocate to developing infrastructure such as public transport systems that stimulate economic development. A rise in the minimum wage also means that low-income employees get sufficient funds to support their families with minimal government assistance (Neumark & Wascher, 2008). Reducing people’s dependence on government aid allows for a reallocation of federal funds to projects that will expand the country’s economy.

Reduced Turnover Rate and Income Inequality

The principal argument against raising the minimum wage is that it jeopardizes employers’ interests to the detriment of employees. However, this assumption is erroneous, as high rates of employee dissatisfaction contribute to high turnover rates, creating challenges for employers. Increasing the minimum wage reduces the likelihood of employees quitting or switching jobs, benefiting employers by preventing the loss of qualified personnel to competitors. By reducing turnover rates, employers can lower costs associated with recruiting and training new employees. Moreover, marginalized communities, such as women and minorities, are most affected by income inequality. As such, increasing the minimum wage is a viable strategy for alleviating race-based and gender-based income disparities.

Weaknesses of Raising the Minimum Wage

Inflation

Economists against raising the minimum wage proclaim that it has a far-reaching negative impact on employers, employees, and the overall economy (Belman & Wolfson, 2014). Labor is a central element of production cost, which should always be sustained at a low level for business viability. Inflation is a consequence of increased production costs, which increases product prices in the market. An increase in employee remuneration creates wage-push inflation, which indicates a rise in production costs and, hence, an increased product price, which contributes to a loss of currency value. Thus, increasing wages leads to higher production costs and, consequently, inflation (Peneva & Rudd, 2017).

Increased Unemployment

Workers in different industries receive varying compensation according to their productivity levels. Financially, it is not logical to compensate a worker $15 or more per hour when their productivity is lower, for instance, $10. This could create losses for the business and consequently, failure to sustain operations. In accordance with the principles of supply and demand, a rise in manufacturing costs results in a surge in product prices, leading to a decline in demand and subsequent efforts by organizations to reduce their production quantity. This contributes to a decreased demand for labor, leading to layoffs and increases in unemployment rates.

A country with a high unemployment rate experiences reduced economic growth due to declining tax revenues (Kosters, 1996). The government revenue dedicated to improving the country’s infrastructure shrinks, leading to decreased infrastructure progress and affecting economic growth. Expanding unemployment rates contribute to increased poverty rates, which can consequently lead to illegal activities such as crime and substance abuse that result from desperation. An increase in the minimum wage also spurs innovation as firms become incentivized to employ machinery instead of human labor. The resulting increase in labor costs has seen a rapid shift from manual production techniques to automation (Wolfram, 2017). For instance, the use of robots to conduct formulaic activities in various industries such as the culinary, production, and transportation sectors has increased, leading to job losses.

Import Dependency

An increase in minimum wage restricts the aggressiveness of professional ventures, specifically multinational businesses. Countries with inflated remunerations usher in the disintegration of firms or lead to inflation due to high-priced products. Consequently, consumers develop a preference for low-cost imports. Thus, the gross domestic product (GDP) decreases as a considerable segment of the country’s funds is spent on other countries’ products, leading to declined revenue. Import dependency also destroys domestic industries, thereby derailing economic growth. The government bears a responsibility to its taxpayers to advance trade incentives to local manufacturers, and raising the minimum wage discourages domestic investors. For illustration, California increased its minimum wage to $15 in 2022, producing cautionary signs such as the relocation or closure of businesses. Research suggests that full implementation of this policy in California will result in the considerable collapse of business entities (Saltsman, 2017).

Discussion

Raising the minimum wage has implications of increasing employer burdens, leading to declined business growth and high unemployment rates. For instance, most companies in America function with a prearranged remuneration budget, and a rise in wage rates will contribute to slower recruitment and increased layoffs. The wage limit restriction enforced by the government may be based on political motivations rather than on cost-benefit analysis. The arbitrary setting of base salaries is not ideal because different industries have contrasting prevailing elements. It would be unsuitable to govern various economic sectors equally as they operate under dissimilar conditions. The implementation and monitoring of a base salary increment is an extortionate basis, compelling a needless economic burden.

Hence, the labor market should be managed similarly to other markets where the conditions determine the costs. Wages determined by the market eliminate the challenge of arbitrarily fixing the wage rate since different industries can set appropriate compensation, which is flexible depending on market trends. Thus, increasing the base wages denies countless people the opportunity to acquire apprenticeship chances, contributing to missed opportunities for a learning platform that equips under-skilled and low-skilled individuals with the competencies and experience necessary for future recruitment. Several people would be keen to accept a salary below the minimum wage, and increasing the amount deprives them of the chance. When employers can comply with wage increase policies, they counteract the economic implications with reduced employee benefits like on-the-job learning, reduced working hours, the abolition of extra shifts, decreased quality of the work environment, and so forth. Rather than increasing the base salary, the forces of demand and supply should be acknowledged to determine the appropriate compensation for the economic benefits of both the employer and the employees.

Conclusion

The primary objective of raising the base salary is to discourage employers from exploiting their workers through low pay. Raising the minimum wage is an essential strategy for reducing poverty rates, as higher salaries improve workers’ purchasing power and, consequently, their living standards. Increasing the minimum wage also stimulates economic growth, reduces turnover rates, and narrows income inequality gaps. Nonetheless, an increase in the minimum wage is often more damaging than helpful to employers, workers, and the economy. Some detrimental effects of raising the minimum wage include inflation, worsened unemployment, and a decline in local industries; this contributes to an over-reliance on imports. Market drivers of supply and demand are valuable in determining the production cost of aspects such as raw materials and product prices.

In my opinion, the federal minimum wage should be raised; however, this should be done in a way that aligns with the prevailing market and economic conditions. The U.S. Department of Labor (n.d.) indicates that the current federal minimum wage is $7.25 per hour, which has been set since 2009. I feel that this current minimum wage is incompatible with the current living standards, making it difficult for citizens to live comfortably. However, forcefully raising the minimum wage to $15 an hour could inadvertently exacerbate the economic situation due to the sudden impact on employers, thus contributing to job layoffs. Therefore, the federal government should assess the federal base salary every five years to reflect contemporary living costs, allowing employers to better adjust to the wage increase.

References

1. Belman, D., & Wolfson, P. J. (2014). What does the minimum wage do?. Kalamazoo, Michigan W.E. Upjohn Institute for Employment Research.
2. Kops, D. (2017). Economists still cannot decide whether the minimum wage is a good thing. Quartz. https://qz.com/1034952/economists-still-cant-decide-whether-the-minimum-wage-is-a-good-thing/
3. Kosters, M. H. (1996). The effects of the minimum wage on employment. Washington, D.C: AEI Press.
4. Neumark, D., & Wascher, W. L. (2008). Minimum wages. Cambridge, Mass: MIT Press.
5. Peneva, E. V., & Rudd, J. B. (2017). The Pass-through of Labor Costs to Price Inflation. Journal of Money, Credit and Banking, 49(8), 1777-1802. https://doi.org/10.1111/jmcb.12449.
6. Saltsman, M. (2017, December 15). Why the $15 minimum wage will cost California 400,000 jobs. Forbes. https://www.forbes.com/sites/michaelsaltsman/2017/12/15/why-the-15-minimum-wage-will-cost-california-400000-jobs/#31ed6e0943b9
7. Smith, L. (2015). Reforming the minimum wage: Toward a psychological perspective. American Psychologist, 70(6), 557-565. https://doi.org/10.1037/a0039579.
8. U.S. Department of Labor. (n.d.). Minimum wage. https://www.dol.gov/general/topic/wages/minimumwage
9. Wolfram, G. (2017, September 12). A case against the minimum wage. Forbes. https://www.forbes.com/sites/realspin/2017/09/12/a-case-against-the-minimum-wage/#285353c7499e

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