Abstract
As the this topic of increasing minimum wage rate is always matter of concern in US we will discuss how the concept of minimum wage rate came into force and at what rate the minimum rate is increase or decreased. The effect on the economy like growth rate, inflation , consumer price Index and their effects will also be discussed.
Introduction
The topic minimum wage is a hot topic these days but it was introduced long back. New Zealand was the first country that came up with national minimum wage laws in 1894. The minimum wage covered almost all the industries and businesses in the country . After New Zealand the second country who implemented the law of minimum wage was Australia in the year 1904. It covered initially only six industries but later covered 150 industries paying low wages. After that UK also introduced the minimum wage law in 1909.
In the year 1938 Franklin Roosevelt introduced the minimum wage law . At that time the minimum wage rate was set at 25 cents an hour which is about $4 per hour in present value. The main idea of passing this law by the Fair Labor Standard Act(FLSA) is to cover things like youth employment standards, overtime pay, record keeping and standard for government at the local, state and federal levels. The minimum wage levels is not set with the rise in inflation but with decision of the action taken by the Congress.
Background
In the year 1938, Congress passed the Fair Labor Standard Act which established a minimum wage of 0.25 per hour. Since then , the minimum wage been raised many times. The minimum wage was $3.35 in 1981 and $4.25 in 1991 and it has been $5.15 since 1997. In real terms (i.e. after taking into considerations the increase in the cost of living), the minimum wage in 2002 was there it stood in 1958. Coverage of the minimum wage was extended over the years, so that 85 % of the workers In the United states are covered. Since skilled wages generally have wages well above the minimum wage they are least affected by it. Thus the most of the affect on minimum wage is on the unskilled workers. In the year 1998 4.4. million workers of the 71.4 million Americans paid by the hour worked at or below the minimum wage . Of these 30% are teenagers and 62% are women. The United states department of labor estimated that the increase in the minimum wage from $3.35 in 1981 to $4.25 in 1991 led to a loss off 1,00000 jobs, mostly teenagers and women with two or three earner families rather than bread winners from poor families. So a moderate increase in the minimum wage will have a moderate and temporary effect on the minimum wage employment and poverty. There are argument put forward by different economist that higher minimum wages will increase productivity, create more jobs while others are of the view that raising higher wages will harm people rater than helping them. An increase in minimum wages will reduce the fringe benefits like health benefits , subsidized meals, uniforms etc. The employment opportunities of apprentices and on job training will minimum wages will be reduced. In the long run tan increase in wage will lead to more capital intensive production techniques rather than hiring worker with higher wages. But recent data shows that the workers in US who received minimum wage was 13% in 1979 and has dropped to 5% in 2012 and 4% in 2013. Among these 64% of minimum wage earners are part time workers and 36% are full time. In the 2013 nearly 1.5 million US workers are in the age group of 16 who earns the federal minimum wage of $7.25 per hour.
The data below shows the federal minimum wage rate since it was introduced in 1938 which was 0.25 cents to $7.25 in 2012.
Distribution of Minimum wages by State in US
In US, the states have their own minimum wages. States like Louisiana, Mississippi, Alabama, Tennessee and South Carolina are five states who do not have a minimum wage rate concept. States like Arkansas, Georgia, Minnesota, Wyoming have minimum wage below the federal minimum wage There are 20 states whose minimum wage is in accordance with the federal minimum wage. But there are 21 states and the District of Columbia where the wage rates are higher than the federal minimum wage rate. In the year 2015 the states that follow the federal minimum wage rate is $7.75, the states that follow minimum wage rate above the federal rate ranges between $8.00 to 10.50. The highest being the District of Columbia.
The Figure below show the minimum wage rate in various states of U.S.
Discussion
Minimum wage rate increase, increases the labor cost and output prices. It reduces firm's profit . It also affect the availability of jobs and the hours employed. All these factors reduce GDP. Minimum wage increase have some benefits like the increase I the earnings of the low skilled workers. This earning increase the spending of the workers to the goods and services and the demand for the goods increase which in turn increases the profit of the businesses. If we see the data US government increased the wage from 1990-91 and the year 2007-09 where there was sharp decline in the GDO growth .But there a higher economic growth when the federal minimum wage rate was increased in the year 1996-97 and during the recession period of 2000 but the real value of the minimum wage declined. GDP growth is measured by the percentage change in GDP over a period of five years while minimum wages is the % change in the ratio of nation's minimum wage to the average wage over the same period. When increase in minimum wages leads to increase ij exports then the GDP increases.
Increasing minimum wages to high rate will have effect on the inflation. It will cause price inflation as business raise the prices of gods and services to accommodate the higher wages. But on the other hand it stimulates consumption and so money flows more in the economy allowing the workers to spend more. But too high of federal minimum wage will have a bad effect on employment. So raising minimum wage to excessively high rate for example, in 2014 the fast food workers of US are asking for increase in minimum wage from $7.50 an hour to $15 an hour which is almost double of the wage rate in that year will put excessive inflationary pressures on the economy. But increasing the wage rate according to the inflation will have a minimum effect.
The consumer price index is the measure of the moving of average prices in households and the average spend by them during a specific period of time. The increase in minimum wage increase the cost of living , the cost of goods goes up so CPI and wages are indirectly related . If the increase in price of goods are higher than the increase in minimum wages then it will have a bad effect on the economy and individual will become more sensitive to raise the minimum wages.
Conclusion
There will be more studies on the effect of minimum wages on the economy, employment of US. Though we can conclude that increase in minimum wage rate is beneficial to the workers, on the other hand reduce employment but every time this is not the case. There are of questions that whether the increase in minimum wage reduce poverty in US but that is also controversial.
References
Dornbush Rudiger. Macroeconomics. Tata McGraw-Hill .2005.
Sabia Joseph. Do minimum wages stimulate productivity and growth?. San Diego University, USA and IZA, Germany. www.wol.iza.org/articles/do-minimum-wages-stimulate-productivity-and-growth.pdf
