Minimum Wage: A Price Floor for Workers' Rights - Essay Sample

Introduction

Minimum wages are the minimum amount of pay given to employees for the work done during a certain period and which cannot be reduced by an individual contract or collective agreement. It is the lowest amount of remuneration that is legally paid by employers to their workers, and it represents the price floor where workers cannot sell labor. The definition of the minimum wage mostly refers to its binding nature, regardless of the methods utilized in its fixation. It is set by a wage council, statute, by tribunals, industrial or labor courts, or the decision of an authority which is considered competent.

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Brief Summary of Minimum Wage

Minimum wages were first introduced in the 1800s, and it started in Australian before it spread to the United States and the United Kingdom in the early twentieth century (Dube, 2019). They are set to protect different workers against low payments from their employers. They ensure payments that are equitable and just to all workers and provides a minimum living wage to employees who need wage protection. Sometimes, minimum wages are considered to be a policy element that is intended to reduce inequality between men and women, rich and poor (Baye & Prince, 2017). Also, they are intended to overcome poverty. Its purpose is to set a wage floor that is different from collective bargaining, which focuses mostly on setting wages above the floor that exist.

The systems of minimum ages are designed in a way that reinforces and, at the same time, supplement various other employment and social policies like collective bargaining, which is utilized to set working conditions together with terms of employment. More so, there has been an evolution on the purpose of the minimum wages as it evolved from being only a policy tool to its utilization in a few low-wage sectors. According to Giuliano (2013), the evolution has been reflected by the International Labor Organization (ILO), in that, in the year 1928, the fixing machinery convention for minimum wage encouraged several countries to develop and implement a policy regarding minimum wages with no arrangements for wage regulation by the collective agreement Then, later in the year 1970, the fixing convention on minimum wages extended the policy to cover all wage earners groups (Giuliano, 2013).

Its effectiveness depends on several factors. The first is the adequacy of the level in which the minimum wages are set and adjusted, whether such level covers all the worker's needs with that of their families with consideration of the economic factors. It also depends on the extent it affords to protect workers in several employments, including various groups ranging from youths, migrant workers, and women, without looking at each worker's contractual arrangements, occupation, and the industries they work. The paper discusses the effects of a minimum wage increase on employees, employers, consumers, and the economy. Then it offers recommendations regarding the increase and its effects.

Effects of Minimum Wage Increase

Effects on Employees

An increase in minimum wages has a positive impact on workers who will receive such payments. The amount of money they will get from the increase will be higher compared to the initial wages earned. The higher earnings will translate to increased living standards for workers as the increase provides them with higher income levels, which is appropriate to handle their cost of living. More workers are elevated above the poverty line because of benefits received from an improved standard of living as a result of an increase in minimum wages. The earnings of employees will rise, and their overall family income will be higher, which then lifts most of them out of poverty.

The increase also translates to an increase in the employee's morale as they now expect higher wages. The employees will fill that their job efforts are rewarded appropriately, and it then encourages and spurs them to put more effort into their job.

Minimum wage increases also have a negative impact on employees. It leads to the problem of job losses. It is argued by business executives and economists that one of the significant costs incurred by a business which then reduces the profitability of the business. Most businesses respond to the increase in labor costs by laying off some of their workers, causing an increased unemployment rate. The impact can be more drastic if a higher number of workers are laid off in an action where most business focuses on outsourcing several jobs to reduces operational expenses of labor. The raise causes some of the low-income employees to lose their current jobs, which causes their overall family income to fall, leading to low standards of living, translating to a reduction in the such employees' daily consumption.

Effects on Employers

The effect of increasing the minimum wages has negative impacts on the part of employers or businesses in general. Employers are forced to incur the costs of raising wages.

Also, there are some benefits derived from the increase of minimum wages on the part of employers as a result of the increased morale it impacts on their workers. The increased worker's morale in any business translates to more benefits in the business. The most significant benefit is the reduction in the costs of hiring and training employees, which is an outcome of an increase in employee retention. Higher employee retention comes due to increased morale caused by higher wages, which makes them put more effort into their job. Businesses will enjoy reduced expenses associated with the relocation of jobs. It is beneficial to businesses when their workers believe their payment is fair (Addison et al., 2013). Employee morale increases together with work ethics. Higher productivity is also realized by firms as their workers after a wage raise will have better mental and physical health. Through reduced turnover, the costs associated with employee turnover reduced, which then leads to reduced training and recruiting costs.

Employers are likely to respond to the increase by increasing the prices of the goods and services of the workers who now receive more wages. The increased prices might cause inflation, which is the outcome of increased prices caused by higher expenses incurred by businesses. Employers raise prices as a way of covering the increase in labor costs, which resulted in an overall increase in operating expenses.

Effect on Consumers

Consumers feel the effect caused by a minimum wage increase through price changes through inflation. The result is caused by firms; as with a raise in the minimum wage, workers are paid higher wages by firms, meaning the costs of production increase with the rise in labor costs from its initial number. Higher costs will force such firms to raise prices as a way of transmitting the extra costs incurred in production to consumers by raising the prices of their goods. The price increase might result in inflation, and consumers are forced to pay more money to purchase goods and services or otherwise cut their consumption by consuming less of the goods that cost higher than before.

Effects on the Economy

An increase in minimum wages boosts the country's economic growth. An increase in wages leads to an increase in consumer spending. More wages would put more money in the worker's pockets, which are then utilized in consumption, resulting in the flow of money from consumers to retailers and businesses. Due to the concept of the multiplier, the effect increases farther, as higher consumer spending due to increased minimum wages results to more money controlled by businesses which are then utilized in investments leading to more outputs of such business and the effect goes on and on resulting to huge benefits in the overall economy.

The impact of the minimum wage increase in the whole economy is felt from the increase in consumer spending after the income of workers increased. Consumption being the element or factor that contributes to the Gross Domestic Product; its increase results in economic growth as a result of the increase in GDP. Higher minimum wages mean the marginal propensity to consume for workers increases with higher consumer spending, which then causes a multiplier effect as higher spending causes other effects on the economy; thus, boosting economic growth.

On the other hand, when minimum wages increase and the labor markets remain competitive, and it is assumed that lower employment is caused by the rise in the minimum wages. The effect will be negative on economic growth. The negative effects start with aggregate demand, which is negatively affected by low employment because unemployed individuals will spend less money, resulting in lower aggregate demand and lower economic growth. Real wage unemployment is caused in this situation through a fall in labor demand and the existence of excess labor supply.

Review

Sabia et al. (2012) analyzed effects caused by an increase in minimum wages of New York state, which increased 39 percent in 2007 to 7.15 dollars per hour from 5.15 dollars per hour in 2004. The study involved comparing the employment effect of the minimum wage increase on New York workers with the nearby workers of New Hampshire, Pennsylvania, and Ohio, which had their minimum wage did not increase. They found that the increase in the minimum wages raised the wages earned by young and less-skilled workers compared to workers of the same category in the control states. They also found that the increase hurt the employment of less-educated and less-skilled workers in New York compared to the control states.

According to Addison et al. (2012), an increase in minimum wages does not reduce employment, especially when the county-level sectoral employment trends are incorporated. Instead, employment after wage raise tends to show a downward trend, which is independent in states which have raised minimum wages compared to another state that has not increased. Also, Pollin & Wicks-Lim (2016) found that an increase in the minimum wage generates a significant increase in the worker's earnings for most workers in the country, with a small price increase that affects consumers of the goods and services produced by the workers who received a pay increase. Wage raise increases the total costs incurred by employers. It has a positive impact on the economy as the extra wages received by workers spend immediately, which thus generates a positive impact on the Gross Domestic Product and employment growth.

Hall & Coope (2012), in their study, found that, from the perspectives of employers or firms, a minimum wage increases the firm's cost of production. The firms or employers are then forced to increase the wages of workers above the minimum wage and, at the same time, seek to maintain the existing wage differentials among their workers. Hence, the wages of more qualified workers are also increased from the actual wage amount. The effect then forces firms or employers to pass such wage rise to those who consume their goods and services by raising prices. The rise in prices causes a shift in the short-run aggregate supply to the left leading to higher inflation which is also experienced when the wage raise causes increase in consumer spending, which leads to demand-pull inflation through higher demand of goods and services which surpasses the supply of the same goods and services. The study concurs with that of Cengiz et al. (2019), who found that inflation is caused in two ways by a...