The purpose of this memo is to give an overview of the theory of labor economics. Firstly, it will highlight the interaction of supply, demand, and prices of labor/wages. This is followed by a brief explanation of the benefits and costs associated with an increase in the minimum wage. Next, recommendations will be made on the way forward for Michigan State. The recommendations given will be supported by reasons. Finally, policies will be suggested on what the state should do to guide regulation of wages.
In labor economic theory, the price of labor affect and is also affected by the forces of demand and supply. When other factors are held constant, a reduction or increase in the number of jobseekers increases/reduces wages. As a result, changes in prices or wages of labor services regulate demand and supply for the latter (Abbot 1). Free and flexible labor markets are self-regulating. When the minimum wage is increased, the demand for labor decreases. A higher minimum wage also leads to the increase in labor supply. A higher minimum wage, therefore, increases unemployment. On the other hand, a minimum wage leads to an increase in the labor demand and a decrease in labor supply. A minimum wage, therefore, minimizes unemployment.
A higher minimum wage has a number of benefits. According to Dube (13), a higher wage rate helps families to attain economic self-sufficiency and also to escape poverty. Dube also pointed out that increasing minimum wage rate helps to compensate for the rising cost of living and inflation. Raising minimum wage also has additional benefits. For example, increased minimum wages benefits many employees who do not rely on highly-paid older workers (Dube 7). Evidence also suggest that increasing the wage rate helps in reducing the job turnover due to reduced vacancies arising out of workers leaving low-paying employers in search of higher paying jobs.
Apart from the benefits, there are costs associated with increased minimum wage rate. According to Holzer, raising minimum wages are likely to harm poorest workers in America. Firstly, raising the minimum wage rate would make employers be reluctant in employing workers who possess moderate skills. Holzer also pointed out that increased minimum wage rate would motivate employers to cross borders to other states or move out of central parts of cities to suburbs. Furthermore, employers might take more time finding ways of maximizing low-skilled workers to compensate for the increase wages. As a result, many of them will opt for other methods of reducing labor such as the use of robots creating unemployment. Other studies, however, suggest the distribution of costs and benefits associated with wage increase is less clear (McCurdy and O’Brien-Strain 10; Meer and West, 15-233).
The current minimum wage rate in the State of Michigan is $8.50, and it was last raised on January 1, 2016 (LARA). However, the federal minimum wage rate is $7.25. Michigan’s minimum wage rate is higher than the federal wage rate. The proposed minimum wage rate of $15 is way too high for Michigan and adopting it may result in negative consequences.
Evidence show that increasing minimum wage rate does not cause any impact on employment, and when it causes, the impacts are usually negligible (Schmitt 1-28). Although the minimum federal wage plays an important role in setting out the national yardstick, it does not apply fairly across all states given existing disparities among states in their capacity to offer a uniform federally set minimum wage rate. Based on the foregoing evidence, I, therefore, recommend an increase in the minimum wage rate for the State of Michigan. However, the increase should not be too high as to approach the proposed $15.
First, when setting the minimum wage rate, the State of Michigan should consider the cost of living. Second, when indexing the minimum wage rate, consumer price indexes (CPIs) should be used. Third, to minimize likely negative impacts of local mandates, the counties and cities should be encouraged to coordinate the region’s minimum wage setting. The state should raise the minimum wage rate to 50% of the median wage of the local area. This ensures that the wages earned by lowest-paid workers can support them sufficiently. The state minimum wage should take into account the inflation and the cost of living. This will help in guarding any likely reduction in the wage floor. All local governments should coordinate each other to avoid any negative consequences of raising the minimum wage. Minimum wages paid in cities ought to be higher than places outside cities due to the high cost of living. Policies ought to be enacted to make minimum wage paid to be binding and based on the state median wage. Since raising minimum wage rate only benefits low-wage earners, the state should come up with policies which specifically target people in poverty and low-income families who do not benefit from the increased minimum wage rate. Further, the state should consider formulating policies which increase pretax for low-wage workers used to finance programs which target low-income families.
Works cited
Abbot, Lewis. “Theories of the Labor Market and Employment: A Review.” Manchester: Industrial Systems Research, 2011. Print.
Dube, Arindrajit. "Proposal 13: Designing Thoughtful Minimum Wage Policy at the State and Local Levels." Policies to Address Poverty in America 137.7 (2014).
Holzer, Harry. “A $15-hour minimum wage could harm America’s poorest workers.” Fortune Magazine. 30 July 2015. Web. 15 April 2016.
Licensing and Regulatory Affairs (LARA). “Michigan's Minimum Wage.” State of Michigan, 2016. Web. 15 April 2016.
McCurdy, Thomas and O’Brien-Strain Margaret. “Who benefits and who pays for minimum wage increases in California?” Stanford University: Hoover Institution, 2000. Print.
Meer, Jonathan, and Jeremy West. 2015. “Effects of the Minimum Wage on Employment Dynamics.” Upjohn Institute Working Paper 15-233. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. http://dx.doi.org/10.17848/wp15-233
Schmitt, John. "Why does the minimum wage have no discernible effect on employment?" Center for Economic and Policy Research 22 (2013): 1-28.
