Abstract
Minimum wage legislation has diverse impact on county’s economy. This is because it interferes with market demand and supply of labor. The negative economic implications brought by increase in minimum wage are increased inflation, unemployment and under employment, investors opting not to invest in the country, and increased wage rigidity during times of business recession. Extend in which the effect is felt depends on the level of minimum wage in respect to equilibrium wage. Therefore the government legislation and collective bargaining agreements regarding minimum wage should be careful to avoid adverse effect caused by alteration of minimum wage.
Negative Effects of minimum Wage Laws
Setting minimum wage through the use of a government legislations or collective bargaining between labor unions and employers interferes with market forces of demand and supply. Advocates of minimum wage argues that increasing minimum wage level would result to improved living standards, serve as motivation, and increase cash flow among the low income, hence more consumption. However, these effects are not felt because of other restraining factors resulting from the wetting of minimum wage (Simon &Francis, 2009). Minimum wage level has a lot of negative implication in the labor market especially where the minimum wage is different from the equilibrium wage. Minimum wage levels sets price base for the labor market, affects investment base, increases the cost of production, and leads to inflation. Moreover, skilled workers benefit at the expense of less skilled workers. The minimum wage method of controlling wage levels is ineffective as it does not consider market imperfections (Butler, 2006).
Alternative methods of achieving the desired results may be better than the minimum wage level. These would include basic income, guaranteed minimum income, Refundable tax credit, and collective bargaining. Negative income tax, as well as others, may be used to handle poverty better than minimum wage. This is because of its wide distribution of costs among all citizens rather than on low earning employees. It is for this reason and others discussed below that makes minimum wage level no better solution (Butler, 2006).
Reasons against Minimum Wage Laws
Firstly, minimum wage legislation is seen to set a price floor in the labor market. Its effect of demand on labor is only felt if such wage level is different from the equilibrium wage. In such a situation, employers will decrease their demand for employees. This will lead to increase in unemployment level. High unemployment rates in turn pose many challenges such as crime, poverty, and protests. Therefore, it is not important to set minimum wage level at the expense of increasing unemployment rate. This is because it is better to have a moderately paying job than to lack a job at all (Butler, 2006).
Secondly, increasing the minimum wage raises the labor cost. Therefore, employers are forced to transfer this burden to consumers by raising the prices of goods and services in an attempt to maintain their profit margins (Simon &Francis, 2009). The extent to which the cost can be transferred to consumers will depend on elasticity of demand. For example, food sector prices in USA can rise with elasticity of 0.1 within one month of minimum wage rise. The increase in price level will not make the receivers of raised minimum wage to benefit in real terms. This is because the additional wage will be subjected to higher cost of market commodities. On the other hand, the population which does not benefit from the minimum wage will face more economic hardships due the increased price of commodities. Moreover, the country may suffer from decrease in demand for its exports as they become more expensive. However, this will only be felt if other countries producing same commodities fail to alter their minimum wage which may not be possible.
Thirdly, producers may be forced to absorb some of the additional increased profits. This automatically leads to fall in profit margins. Producers may be tempted to migrate to countries where they can obtain cheap labor. In addition, potential investors will shy from investing in a country whose minimum wage level is high. Therefore, increase in minimum wage level may not only affect employment level, but also the country’s investment base. Therefore, it is possible to reduce country’s net exports and increase unemployment rate (Catherine, 2008).
Fourthly, the increase in minimum wage level leads to demand pull inflation. The aggregate demand of goods and services will increase and this will lead to increased price level. Therefore, the government will be forced to intervene to control inflation indicating an increased macro problem to the government. Unstable inflation rates have much worse consequences in country’s economy. High inflation rates would result to high cost of living (Jonathan, 2010).
Fifthly, the increase in minimum wage level may easily compel employers to reduce working hours. This results to under employment giving a clear indication of loss of earning for workers. Therefore, the increase in wage level may automatically result in net welfare loss for workers. This is experienced because one will receive higher compensation per working hours, but the total working hours available will be fewer. The wage rise may therefore affect the worker negatively in the event that the employer decides to reduce working hours. Alternatively, in a bid to reduce increased labor cost firms may be compelled to reduce employee’s benefits. A study analyzing impact of increase of federal minimum wage found that twenty percent increase in minimum wage resulted to four percent decrease in employer sponsor in health insurance (Jonathan, 2010). Employer is likely to find alternative ways to offset the increased labor cost and this may easily make the employee worse off even with increased minimum wage level (Jonathan, 2010).
Sixthly, the increase in minimum wage level brings real wage down wards rigidity. This has diverse impact on businesses during periods of recession. This is because it leads to acute levels of unemployment during future recession periods. Therefore, it is harmful to business in long run as is clear that business boom periods are followed by recession as per business circle. There is no reason to make a move of increasing minimum wage during boom period, yet the adverse effect in periods of recession cannot be handled effectively (MacDonald & Aaronson, 2006).
The number of available job opportunities for less skilled workers fall with increased minimum wage requirement. This is because their productivity may not match the minimum wage offered. This is unproductive for a business, therefore, employers will only be interested in hiring highly skilled workers only. This may lead to increase in dependency ratio in the society or under class group of people who will only rely on government aid for survival. This leads to increase government expenditure on offering free services to this class, hence depriving it funds for development (MacDonald & Aaronson, 2006).
Firms seek to minimize the cost of production, therefore high minimum wage levels results to outsourcing of foreign cheap labor (Catherine, 2008). Moreover, it can establish production plants in foreign countries near its markets. Consequently, high operational cost at home production would be covered in foreign production. This reduces employment opportunities and leads to capital flight.
Moreover, wages should be linked to productivity. Setting minimum wage level reduces firm’s capacity to achieve its goals (Butler, 2006). This is because wages and salary increment for good performance attracts pay hike, however, salaries and wages serves as a de-motivator with minimum wage levels. This is because highly productive workers would receive smaller salaries or wages.
The variation in cost of living from one region to the other makes universal minimum wage level impractical. This is because its application stands only to benefit minority. Therefore, there is need for a more universal policy (Catherine, 2008). In addition, abolishing minimum wage levels would enable businesses to operate with high efficiency. This can be illustrated by the fact that at lower wage level an employer will be having a higher capacity to invest in more employees that under the minimum wage level requirement. For example, if the minimum wage level is 8 US dollars and the budget for labor is 80 US dollars for 7 employees. This condition will only allow the employee to hire ten workers. However, at a wage level of 7 dollars 11 workers could be employed. Thus achieving greater efficiency with the required number of workers.
Lastly, less skilled or unskilled workers would hardly get a job. This is because the employer compares the marginal cost to the marginal revenue as result of hiring the worker. However, the marginal revenue for less skilled workers would be lesser than marginal cost. Therefore, such employees would not be hired (Butler, 2006).
Conclusion
Minimum wage has a lot of negative effects to employers, employees and country’s economy at large. Minimum wage is mainly set through government legislation or collective bargaining by labor unions. It is usually different from equilibrium wage therefore it interferes with market forces of demand and supply of labor in an economy.
Minimum wage make country’s economy suffers from: increased inflation rate, decreased job opportunities for less skilled labor, decreased net exports, scaring of potential investment, unemployment and downwards wage rigidity in period of business recession. It is therefore disadvantageous for a country to insensitively set minimum wage level.
References
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Catherine, S. (2008). Fixing minimum wage levels in developing countries: Common failures
and remedies. International Labor Review, 147 (1), 25-42.
Jonathan W. (2010). Did the national minimum wage affect UK prices? Fiscal studies, 31(1),
81–120.
MacDonald, J. & Aaronson, D. (2006) .How firms construct price changes: evidence from
restaurant responses to increased minimum wages. American Journal of Agricultural
Economics, 88, 292–307.
Simon, D& Francis, G. (2009). One hundred years of British minimum wage legislation issue.
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