A minimum wage is the minimum amount of remuneration which may legally be paid to workers. In other words, it is the minimum price below which people are not willing to sell their labor as it will be illegal. In the USA the minimum wage is determined by a body of laws stated in federal, state, and local statutes. Such legislation is introduced nowadays in almost 90 % of all countries. Other countries, which have no minimum wage law, such as Denmark, Sweden, Austria etc., rely on binding collective bargaining regarding this issue.
The minimum wage has an impact on the work of the most poorly paid employees. For the first time this method of control has been proposed as a means of combating "sweating" system of production as it was believed that the owners set "unfair" price for the work of their unqualified employees. The roots of this method of solving the problem lie in the belief that the market is not able to establish a "fair" price of labor for less capable workers independently. Therefore, the only way to solve this problem is to change the administrative structure of wages and redistribution the income accordingly. In this regard, the minimum wage is one of the ways of fighting poverty.
Raising the minimum wage level may be accompanied by both positive and negative consequences for the economy. Therefore while developing the wage policy the question, what the minimum wage is economically justified and acceptable in the prevailing economic conditions of the country, needs to be thoroughly analyzed. It is also necessary to take into account, in which case the positive effects of a minimum wage will exceed the negative effects and whether the experience of other countries could be useful.The establishment of an effective level of the minimum wage can have the following possible consequences. Firstly, there may be reduction in the level of employment at some enterprises. This concerns primarily those enterprises where there is relatively large number of low-paid workers. Secondly, the increase of minimum wage, creating greater labor costs, may hinder the process of setting up of new businesses, thus contributing to a reduction in employment. In the third place, the increase in the minimum wage as a rule leads to an increase in the overall level of the average wage, as the new minimum wage gives a good reason forother groups of workers to demand higher wages, causing the so-called "spill-over effect" .
Although the minimum wage is applied in many countries there is no single opinion regarding the benefits and the harm that establishing such a minimum brings.
According to neoclassical economic theory the establishment of the minimum wage above the equilibrium point leads to an increase in unemployment due to the fact that more employees want to work for that money and fewer employers are willing to pay it. This situation arises because the minimum prices for labor, set too high artificially, increase the costs of the enterprise, which then accordingly has to hire fewer employees in order to maintain the level of profitability. Thus, it can be argued that the establishment of the minimum wage improves the lives of people whose rates were increased, but it affects the interests of those who were not hired.
Supporters and opponents of the minimum wage say about the different effects of the introducing of the minimum wage and its raising.
Negative effects:
Similarly to protectionism, the minimum wage reduces competition in the labor market; prevents firms from reducing costs during economic recession; leads to economic inefficiency, unemployment, poverty, rising prices and dysfunction on the whole2) Causes damage to small businesses rather than to large.3) It cuts down labor demand either by reducing working hours or by cutting jobs.4) It leads to price inflation, as the business tends to compensate for the losses, including them in the price.5) It encourages the poorest and the least productive workers instead of more productive and skilled.6) It may lead to the exclusion of certain groups from the labor market.7) The minimum wage method is less effective in struggle against poverty and causes more damage to the business than other methods.8) It discourages the poorest populations, in obtaining additional education as well, by guaranteeing them a chance to get a job.
9) The sharp increase in the minimum wage may be a factor of the expansion of the shadow economy. Increased labor costs can make small and medium-sized enterprises "go into the shadows".
Positive effects:
1) It increases the standard of living for the poorest and most vulnerable segments of the population and increases its average level.2) Motivates and inspires employees to work harder (as opposed to social programs and other similar payments). 3) It stimulates consumption by increasing the money supply in the hands of the poor. 4) It stimulates working with zeal of those who receive little, as the employer requires more for more money.5) A business can spend less on training of their employees due to the reduced fluctuation of personnel.6) It reduces the state-paid social expenditures due to the increased income of the poorest.
But what kind of real issues does a business face due to the increasing of minimal wage? According to a survey conducted by the Los Angeles County Business Federation after announcing the law about increasing the hourly minimum wage by 2020, 59% of employers in Los Angeles plan to introduce automation into their production, which will reduce half the number of jobs. Many owners of restaurants and snack bars are going to close or move them to the suburbs because of the increased labor cost (Winter, “L.A. to Boost Minimum Wage to $15”).
The Seattle Times newspaper conducted a survey among business owners to determine their possible reaction to increasing the hourly minimum wage. Almost 60% of respondents said they plan to increase prices for their products, 42% said they "very likely" will cut work hours of their employees, more than 43% confirmed that they "most likely" will restrict the expansion of their businesses and 7% are planning to close their businesses within the city. The survey results are unlikely to be joyful for 16-19-year-olds, the unemployment rate among whom is 30% ("More Seattle Restaurants Close Doors”).
There is an opinion that the forced increase of the minimum wage helps working poor people, increases the wages of poor-qualified workers and reduces inequalities in income of people. It is contradicted by the opinion that raising the minimum wage significantly reduces the employment of unskilled workers, hinders the training of unskilled workers, condemning most of them to a miserable existence.
The main purpose of any business is to work effectively and reach higher level of profitability. Raising minimum wage leads to increasing labor costs. In this case, in order to survive in the market, employers are forced to either raise prices for their products, or reduce the list of services provided, or to dismiss part of the workers, or to automate production processes. Most often, business owners do it all at once. However, not all of them manage to maintain their profits, and they leave business, what affects first of all the low-paid unskilled workers. Low-wage jobs are mostly intended for young people who have just emerged into the labor market. They gain valuable experience of team-working, learn about the work ethic, labor discipline, etc. Such period of work should not be long; it should serve as a start for a professional career of young people. Increase of minimum wage kills their initiative to improve their skills, professional qualification. The mentioned above research has shown that almost 59% of business owners plan to carry out investments in the automation of work processes, rather than the creation of new low-wage jobs. For example, McDonalds announced that it plans for the next year to install technologies to refuse cashiers taking orders and ordered a meal payment. It is expected that in the next few years to 70% of today's low-skilled jobs will be automated (“Minimum Wage Backfire”). Thus, the new technologies benefit from raising minimum wage and unskilled workers are hurt.
Works Cited
“Minimum Wage Backfire.” The Wall Street Journal. 22 Oct. 2014. The Wall Street Journal. Web. 28 March 2016. < http://www.wsj.com/articles/minimum-wage-backfire-1413934569>.
“More Seattle Restaurants Close Doors.” Shift Wa. 12 March 2015. Shift Washington. Web. 28 March 2016. < https://shiftwa.org/more-seattle-restaurants-close-doors-as-15-minimum-wage-approaches/>.
Winter, Michael. “L.A. to Boost Minimum Wage to $15.” USA Today. USA Today, 19 May 2015. Web. 29 March 2016. <http://www.usatoday.com/story/money/2015/05/19/
los-angeles-approves-15-dollar-minimum-wage/27604949/>.
