The concept of full employment, or the natural, frictional, and rate of unemployment plays a central role in macroeconomics and its policy. Let's start with natural employment. The determinants of the natural rate of unemployment are duration and frequency of unemployment. The duration of unemployment depends on cyclical factors in addition to the structural characteristics of the labor market. The organization of the labour market including the presence or absence of employment agencies , youth employment services. The demographic makeup of the labour force. The ability and the desire of the unemployed to keep looking for a better job which depends on the availability of unemployment benefits. For example a person may quit a job to have more time to look for a new and better one. This kind of employment is search employment. If all the jobs ate same a, an unemployed person will take the one that is available but if there are better jobs than they will search and look out for better jobs. So higher the unemployment benefits, higher is the search for new jobs. So increase in unemployment benefits will increase the rate of unemployment. The behaviour of the laid workers are also important in determining the duration of unemployment. Generally a worker who is laid off will return to his original job and will not search for another one. The main reason is that when a worker is working in a company for a long time then he has special expertise in that job and have also built a seniority position like having a pension. So these type of employed workers will not look for better paying jobs.
Frequency of Unemployment
The frequency of unemployment is the average number of times per period that the workers are becoming unemployed. There are two determinants of this frequency of unemployment are the variability of the demand of labor force across different forms in the economy. Even when the aggregate demand is constant some firms are growing and some firms are contracting. The contracting forms lose labor force and the growing firms hire more labor so the frequency of unemployment is greater. The grater the variability of the demand of labor forces the greater is the rate of unemployment. The second determinant is that the rate at which new workers enter the labor force, the new potential workers become unemployed. New workers enter the labor force, the faster is the growth rate of labor force and higher is the natural rate of unemployment.
Equation of natural rate of Unemployment
Estimates of the natural rate keep changing from 4 percent in 1960s to 6 percent in early 1980s to 5.2 percent in the ate 1990s. Now if we take natural rate of unemployment as u* then the natural rate of unemployment is the weighted average of the natural rate of unemployment of the subgroups in the labor force.
u* = w1u1* +w2u2* +w3u3* +..+wnun*
When the overall rate of unemployment was 1950 was 4 percent then some adjustments were done in the composition of the labor force( i.e. the weights w) for the changes in the natural rate for different groups(i.e. u* for each group). One of the adjustment in the changing force of unemployment is the changes in increasing the share of the teenagers. Due to them the rate of unemployment is higher in the labor force.
Minimum Wages
The methods to reduce the natural rate of unemployment focuses on the high rate of unemployment among the teenagers. The teenagers enter and leave the labor force as the job they enter are not that attractive. To improve jobs in some countries like Germany focuses on providing training to the teenagers and thus make holding on to a job more rewarding. The European apprenticeship system in which young people receive on the job training is widely credited not only providing serious jobs for the young but also making the youths as productive workers for a long time. Teenagers wage are related to minimum wages in comparison to the experienced ones. Many teenagers earn minimum wages and some earn less than that if permissible. So reducing the minimum wage arte might be one of the way in reducing the teenage unemployment rate. But the programs that allows "sub minimum" wages for teenagers appear to mitigate the negative unemployment effect of minimum wage laws. So, it is the minimum wage that the workers should receive according to the law.
Research on Minimum Wage by David Neumark
Since 1990s lot of economists have studied about the employment effects of raising the minimum wage. Some of these studies are named as "new minimum wage" and have used different methodologies to control the variables unrelated to minimum wage like regional employment which is not affected by minimum wage changes. The economist from the University of California – Irvine ,David Neumark1 that argued that the increase in the minimum wage will cost jobs is not valid . The survey he did and the methodology he used was to some extent was inaccurate. But the survey of Neumark in the year 2006 on Minimum Wages and employment : A review of evidence from the "New Minimum Wage Research" shows that 85 percent of the "most credible" research done on the effect of raising minimum wage results that job losses will occur . However, many economist does not consider his way as a true meta study. The meta studies give more accurate and valid results(“Minimum Wages and Employment,” Neumark, David).
View of other Economist
There were many economist who used different and advanced ways to analyze the effects of raising the minimum wage but the results that was found did not boost the economy. Whenever the minimum wages were raised , the worker spent their extra income. So in 2014 Congressional Budget office (CBO) published a report based on the older methods of research where an increase in minimum wage rate will increase the unemployment in U.S. by 50,000 workers unemployed. Many economist criticized as they used the older methods rather than the new ones. Even Goldman Sachs2 reviewed that this job loss estimates are overstated. Despite the different opinions and flaws the positive finding of CBO reports that 24.5 million people will benefit from a wage increase of $10.10 and about 1 million people will be out of poverty3("Employment and business Effects of Minimum Wages Increases").
Advantages of increasing minimum wage rate
Higher wages are beneficial to the business as they have more savings when they increase the wages. Low wages means high employee turnover. So increase in wages reduce the turnover of a business. Workers having low wages are less committed towards job than the high paid wage earners. So they leave the job frequently. The employers have to find new workers and train them which costs the company significantly. It takes a lot of time to train these workers. This is a problem faced by many fast food industry in U.S. The different studies shows that increase in minimum wages saved around $5.2 billion cost to the businesses. According to data the fast food industries like McDonald's and Burger King , the cost of turnover was approximately $4,700 every time a worker left their jobs. In 2005 an article of Harvard Business school published that the wholesale retailer Costco when increased the wage rate than other retailers then the overall turnover decreased . There was less employee theft and employees generated greater productivity. Again in case of home care workers in the Bay Area of U.S. found after increasing the wage arte the turnover fell by 57 percent. The data shows that increasing wage rate reduces the turnover and adds profit the businesses. It is also beneficial for the society who live in that society as all workers are ultimately working to have more money and lead a luxurious lifestyle. Due to increased income workers will also invest in the betterment and development of the society.
Low wages decrease the productivity . The experienced worker getting low wages are more productive than the high wage earners who are new to the industry even after training. The new workers take time to learn the job which creates loss for company in customer handling to production. For example,in the year 2003, workers at San Francisco Airport had an hourly wage rate at $6.45. But after the wage rate increase to $ 10 an hour, 35 percent of the workers shoed improvements in work, 47 percent in better employee morals, 44 percent showed less disciplinary issues and 45 percent showed improvement in their behavior towards the customers. This shows that increasing wage is an incentive and motivation for working more and in an efficient way. the performance of the worker increased .
Raising wages allows the workers to spend more money thereby increasing the money flow in the economy. This also helps in the growth in the different sectors of the economy. For example , higher wages means workers will try to invest in real estate and the housing industry will develop and ultimately the growth of the country will develop. When workers spend more due to increase in wages then the businesses are gaining more and they need to hire more employees to satisfy the customers and thus employment increases.
The low wage earners are not able to meet their daily expenses through their salary a have to depend on the social programs that the government run to support them. But raising the wages will reduce their dependency on these government aided programs.
Disadvantages of increasing the wage rate
If wage rate in increased then the companies with a fix budget cannot keep more labor force. So the company has to curtail the cost and one of the prime cost curtailing method is the lay-off of employees.
When the businesses will increase the wages it will have an effect on the consumers. The will increase the price of the product to gain more profit and provide sufficient wage to the employees.
If the minimum wages are increased the hiring of more workers decreases. The businesses who pay low wage teenagers cannot hire many workers and may in due course of time outsource the jobs to employees of other countries specially in developing or underdeveloped countries where the people are eager to earn more. Thus there will be less jobs in U.S.
If the minimum wages are increased then the competition will increase. The highly qualified workers will take the places for the young teenage individuals making their job market pretty low and competitive. There is fear that the higher minimum wage rate in a competitive labor market will lead to unemployment of low skilled workers. If the situation occurs of high minimum wage then it will impact the employers who will hire the high skilled workers in place of low skilled workers again the employers can also buy machineries and other equipments in place of low skilled workers. As we have known that teenagers are more into this minimum wage rate so the employment effects of minimum wages provided by national variation shows that in U.S. elasticities between -0.1 and -0.3 are teens age between 16-19 and -0.1 and 0.2 between age group 16 to 24. The meaning of elasticity -0.1 implies that 10 % increases in the wage rate reduces teen employment by1%("The effects of Minimum wages on Employment". Economics Research).
The different states of U.S. have set their own minimum wages which are presently higher than $7.25 per hour a day. There are 23 states of U.S. where the minimum wage is set at more than $7.15 as data of the year 2014 where as in Washington the minimum wage is at $9.32 per hour. So the average increase in the minimum wage is 11.5% higher than the Federal minimum ( Figure 1). Thus the minimum wage is different in different states and inconsistency makes it difficult for the workers and try to find job in these places where the minimum wage is higher. The figure below shows about the different states and their different minimum wages which is higher than the federal minimum .
Source: U.S Department of labor and wage.
Figure 1. Percent difference of the state and Federal minimum wages in the year 2014
Conclusion
This debate makes it clear that though it is beneficial to increase minimum wage but it does not make a significant change in the level of poverty. Though there are various suggestions by various economist and analyst about reducing the national poverty rate but the question arises that increasing the minimum wage does provide benefit for those who are earning it and enjoying better income and living a better livelihood. Though the reduction of poverty due to minimum wage or helps the low income group workers depends on the distribution of family income which determines whether they are better off or worse. Again , due to increase in minimum wages the unemployment rate won't increase but from the perspective of the government the people who are earning high income due to increase in minimum wage benefit but the free lunch helps to reduce poverty. So in all cases government has to provide some benefits to the poor people through different programs. This controversy will remain but whatever the advantage and disadvantage might be but increase in income due to increase in inflation does provides ample opportunity for the workers to lead a better life and also in economic development of the country as a whole. The labor economists have argued and studied different cases to draw the conclusion whether minimum wage reduce or increase unemployment but it has changed in different decades depending on the opportunity and the businesses that have developed. The benefits of high productivity and lower turnover have changed the outlook of the businesses. They are paying higher wages to remain in this competitive industry. Even small businesses are paying higher wages more than the Federal minimum wage and they also support of increasing the minimum wage rate to $12% due to inflation. Large businesses are also trying to improve their wages. The research and the experiences of the employers of leading companies of U.S like Trader Joe's , Costco and other small businesses in recent years have suggested that higher wages increase the earning of the low wage income group and don not reduce the overall employment of the country. The employers benefit a lot as higher wages reduce the turnover and the provide higher productivity which is prime requisite of all businesses. The increase in wages also increases the demand of goods and services which the businesses are selling and thus their profit also increases. The workers provide overall increase in the growth of the country which increase the standards of living of the people living in the country. Thus, the increase if minimum wages though having some draw backs provide better off situation for both businesses and the workers.
Reference List
Neumark, David and Wascher, William L., “Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws,” Industrial and Labor Relations Review, October 1992, 46, 55-81, http://www.nber.org/papers/w3859
Card, David, Katz, Lawrence F. and Krueger, Alan B., “Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws: Comment,” Industrial and Labor Relations Review, April 1994, 47, 487-96, http://www.nber.org/papers/w4528 4
Neumark, David and Wascher, William L., “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment,” American Economic Review, December 2000, 90, 1362-96, http://www.nber.org/papers/w5224
Card, David and Krueger, Alan B., “Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply,” American Economic Review, December 2000, 90, 1397-1420, http://www.nber.org/papers/w6386
Neumark, David and Wascher, William L., “Minimum Wages and Employment,” Foundations and Trends in Microeconomics, 2007, 3(1-2), 1-182, http://www.nber.org/papers/w12663
Neumark, David, Salas, J. M. Ian and Wascher, William L., “More on Recent Evidence on the Effects of Minimum Wages in the United States,” NBER Working Paper No. 20619, National Bureau of Economic Research, Cambridge, MA, October 2014, http://www.nber.org/papers/w20619?utm_campaign=ntw&utm_medium=email&utm_source=ntw
Halvorson, Chad. "The Pros and cons of Raising the Minimum Wage"(2014)
www.wheniwork.com/blog/the-pros-cons-of-raising-the-minimum-wage/
Congressional Budget office, "The Effects of a Minimum-Wage Increase on Employment and Family Income".(2014).February.
https://www.cbo.gov/sites/default/file/44995-Minimum Wage.pdf
"Employment and business Effects of Minimum Wages Increases". National Employment law Project(2015)
www.nelp.org/content/uploads/Minimum-wage-Basics-Business-Effects.pdf
"The effects of Minimum wages on Employment". Economics Research. (2015) December.
http://www.frbsf.org/economic-research/publications/economic-letter/2015/december/effects-of-minimum-wage-on-employment/
"U.S Department of labor and wage". (2014). http://www.dol.gov/whd/minwage/america.htm
