Abstract
The objective of this paper is to analyze the impact of minimum wage laws on the economy as a whole. We have studied the background of minimum wage laws to understand the rationale behind the imposition of such rule. Though we find that the objective of imposition of the minimum wage act have only been partially satisfied as the benefits are hardly received by the poor workers, the benefit for the society as a whole is quite significant. Except for some loss in jobs in some industries the overall impact is positive as it induces more skill formation and gives a support to the wage rate so that it cannot fall to levels even lower than the productivity level. We have discussed both the positive and negative impacts and found that ultimately the positive impacts outweigh the negative impacts.
Introduction
In a market economy the prices of goods are determined by the demand and supply forces of the goods in the economy. The prices of services are also determined the same way. The price at which the quantity demanded becomes equal to the quantity supplied is the equilibrium price of the product or service. Diagrammatically this is the point of intersection of the demand and the supply curves for the product. The wages, which is the payment for labor services, is determined much the same way from the interaction of demand and supply of labor forces.
It is a common feature in an economy that the supply of unskilled labor is quite high and the demand for unskilled or semi skilled labor tends to be quite low. In such a situation the wages for unskilled or semiskilled labor tends to fall. It may fall to such a level that it might not be enough for a full time labor to maintain a proper standard of living. The worker has to support his/her family from the wage that he earns from a full time job. This situation has prompted almost every government to form a system of minimum wage legislation. According to this law an employer cannot offer a wage lower than the rate specified by the minimum wage regulation. The existence of such regulation gives a support to the unskilled workers and an assurance towards a basic minimum payment to afford a respectable standard of living. When the wages have a tendency to fall in the market economy, the minimum wage law gives a support to the labor market. Thus the minimum wage regulation has to revised time and again according to the market conditions and inflationary trends. But it should be noted that minimum wage laws are not unmixed blessing to the economy. It has its pros and cons. It is not always beneficial for the workers even. In this paper we are going to discuss the effect of minimum wage law on the various stake holders in the economy. We begin with a brief account of minimum wage regulation in the US. Then we discuss both the positive and negative impacts of minimum wage.
Minimum Wage Regulation in the US
The Fair Labor Standards Act of 1938 can be taken as the starting point of minimum wage regulations in the US. The minimum wage at that time was fixed at 25 cents per hour . This minimum wage law was effective in the transportation sector, mining and manufacturing industries covering only 38 per cent of labor force. In the subsequent years the law has been amended to include public schools, nursing homes, industries, retail trade, farms, state and local government employees into its ambit. Presently the minimum wage law covers 85 per cent of the US labor force. The minimum wage has been revised 22 times since 1938 and presently stands at $7.25 per hour .
The Beneficiaries of Minimum Wage Law
The objective of the minimum wage act is to provide a support to the poor families. The wage earner who has to support his/her family needs minimum financial support in the form of a minimum wage. But if we look into the labor force statistics we will find that 49 per cent of minimum wage earners are teenagers or adults below 25 years of age . The adults above 25 years constitute 51 percent of minimum wage earners. About 20.8 per cent of the minimum wage earners are full time workers who are family heads.
Benefits of Minimum Wage
Let us discuss the positive impacts of minimum wage laws on the economy.
Incentive to Look for a Job
The assurance of a minimum wage that ensures a respectable standard of living induces the jobless to look for a position . In the absence of such a law the minimum wage offered could go down to such a level that would make people to prefer remaining without job.
Saves Public Money
When a person finds the minimum wage more financially helpful than the public assistance received then the worker would surely want to be employed. Thus fining a job will mean that the person no longer has to depend on public benefit schemes and thus the burden on tax resources is reduced .
Support to Single Parents
It has been found in surveys that around 6.1 per cent of minimum wage earners are single parents. Thus the minimum wage law helps such single parents who have to fend for their family with the minimum skills that they possess. The minimum wage act gives them the chance to earn a living, a chance for survival when they do not have any ‘marketable skills’ .
Higher Skill Formation
It has been observed that the minimum wages regulation leads to reduction in employment for the low skilled workers, mostly teenagers . The fall in employment for less skilled workers induces them to acquire higher skills to get into the job market. Thus this leads to a positive outcome for the economy.
Higher Earnings for the Labor Force
In cases where the labor market is characterized by monopoly the imposition of minimum wage regulation will lead to higher earnings for the labor force and hence distribution of income in favor of the labor force. When there is a shortage of supply of labor the minimum wage restrictions do not lead to fall in employment hence the total expenditure on wages increase. Thus there is redistribution of income in favor of the workers.
Negative Impacts of Minimum Wage
Job Loss during Recession
In a period of recession the firms are faced with a situation of falling prices. The fall in prices lead to revenue loss for the firm. But the existence of minimum wage legislation does not allow the wage to fall. The employers prefer to make the existing workers to work extra hour rather than hire more laborers at the minimum wage.
Increased Discontent among other Employers
It often happens that as the minimum wage rises a section of the workers get a wage hike. While the workers receiving just above the minimum wage face no wage hike. This kind of a situation leads to increased tension and dissent among the workers.
Reduction in Employment
The enactment of minimum wage law leads to increased of production for small enterprises . The production technique in the small enterprises is primarily labor intensive. Therefore a major portion of the cost is comprised of payment of wages. The minimum wages restriction leads to increase in cost of the small enterprises making them cut on recruitment to save cost. In many cases the increased cost reduces production and hence employment.
Impact on Poverty
One objective of imposing the minimum wage regulation is to eradicate poverty. But only a small portion of the minimum wage workers are full time wage earners. A major portion, almost 75 per cent, of the minimum wage earners is part time workers . Thus they have to rely on other sources of income. Thus the minimum wage law cannot make any significant change to the poverty level.
Spiraling Wage Cost
The increase in the wages of the unskilled laborers creates discontent among the skilled workers. The skilled workers also places demand for higher wages creating an wage spiral in the economy that can lead to inflationary situation.
Decrease in Employment over Time but not Across Firms
Studies based on time series analysis have conclusively revealed that the increase in the minimum wage leads to decrease in employment. But this is not true across firms. Cross section analysis of the impact of minimum wages have reveled that employment remains the same or even rises in some cases . It often happens that the minimum wage is quite lower than what a firm is paying to its unskilled workers. In such a situation the firm will not be affected by the minimum wage legislation. It has been observed that n many cases there are a slight increase in employment.
Market Inefficiency
The equilibrium wage is determined through the interaction between demand and supply. When minimum wage restriction is imposed there is market intervention. There is excess supply of labor in the market at the higher than market wage rate. Hence inefficiency creeps in. It leads to dead-weight loss as the producer surplus is lost. It should be noted in this context that in a competitive factor market the factor is paid according to the value of the marginal product. If the wage is higher than the value of marginal product the firm will incur losses and tend to reduce employment or cut down production.
Reduction in Fringe Benefits
Economists often argue that the minimum wage restrictions lead to higher costs for the employers. To reduce costs the fringe benefits to the existing workers are removed. But studies in some sectors in the economy like restaurants and fast-food joints show that minimum wage impositions did not lead to any reduction in the fringe benefits for the workers .
Conclusion
The present study shows that the imposition of minimum wages has some welfare grounds. It mainly perceived as a tool for poverty alleviation. It aims at the standardization of pay for the low skilled worker. But the very objective of the wage law is often questioned as the beneficiaries of the minimum wage law are seldom full time workers. Only a small fraction of the minimum wage workers are full time laborers who have to support their family. A major portion constitutes teenagers who often come from families that have income quite higher than the poverty level. The imposition of minimum wage regulation often leads to loss of jobs and fringe benefits. But this is not true for all sectors. In some sectors there are instances of increased wage without loss of employment. Thus minimum wage law is a way of providing support to the less skilled workers who have low income to support their families. The negative impacts like loss of jobs is quite small compared to the positive impacts.
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