Economics Essay Sample: National Minimum Wages

In contemporary society, raising the minimum wage has been one of the main controversial issues. The topic has increased momentum amongst policymakers as a method of lessening rising minimum wage and income disparity. Some scholars argue that the minimum wage should be increased since it is good for the economy and the employees while others claim that it should not because many workers will be hurt. Another group of individuals asserts that minimum wage should not exist at all since it will not benefit the economy and the employees. The debate regarding the raise of the minimum wage is whether this will cause the loss of jobs or not. This essay will introduce the minimum wage, define it, give its history, consequence of increasing it on employment (employers and employees), implications of raising it on the economy, and the individuals it affects.

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California was the leading state to embrace the legislation of raising the minimum wage to $15 per hour. Other cities that are on the course of adopting the law are Seattle, Washington D.C. and New York. These changes came after many decades of national discussion about the need for raising the minimum wage so that families can earn a good living. The federal minimum wage of the United States was first introduced in the 1930s when many nations were affected by the great depression. Initially, the minimum wage was 25 cents per hour and was raised to $7.25 in 2007. Raising a minimum wage has an economic impact on a nation, the employees and the employers.

What is Minimum Wage?

The minimum wage is the least level of earnings of the workers that is set by the government legislation (Richason, 2016). It can also be defined as the minimum amount of pay a worker must earn after working. Therefore, according to the legislation, it is not allowed to pay an employee less than the expected minimum wage.

History of Minimum Wage

Massachusetts was the initial state to enact the legislation on minimum wage in 1912. After that, the Congress established the minimum wage in 1938. The underlying minimum wage permitted by the law was 25 cents per hour. The minimum wage authorized by law was finally increased in 2007. During that time, the Senate elevated the minimum wage from $5.15 in 2007 to $7.25 in 2009. Columbia and other cities have minimum wages that are higher than the government rate. Washington D.C. is the leading city with the highest minimum wage rates of $9.19 per hour (Clemens, 2014). In America, the usual minimum wage is $7.57 per hour. In the last 65 years, the minimum wage has been varying. However, in 2013, the average minimum wage was $6.60. From 1948 to 1968, the minimum wage ranged from $3.09 to $8.67 (Neumark, 2016).

Consequence of Increasing Minimum Wage on Employment

Whenever the topic of increasing the minimum wage is raised, what comes into people’s minds is the aspect of job loss. The other issue that comes in people’s minds is that many companies will hire low-skilled employees (Neumark & William, 2007). Many states have recently increased their minimum wages since 1980. The consequence of increasing the minimum wage on work has been a subject that has been mostly examined by the labor economists. Some studies have not reached an agreement as to whether the increase will have an effect on employment. However, numerous studies indicate that increasing the minimum wage will affect work by increasing unemployment rates (Neumark, Salas, & Wascher, 2014).

Effect of Increasing Minimum Wage on Employees

According to Clemens and Wither (2014), the minimum wages have an adverse impact on employees. Various scholars give conflicting suggestions on whether increasing the minimum wages translates to fewer jobs for these employees or not. However, current literature claims that general employment can be affected (Clemens & Wither, 2014).

The controversy of the consequences of minimum wages on employment comes from a theory of labor markets. The present model of the labor markets forecasts that increase in the minimum wages will eventually translate to job loss amongst the low-skilled employees. When a “compulsory” minimum wage is higher as compared to the reasonable equilibrium wage, employment is reduced because the employers often substitute the low-skilled workers with the high skilled employees (Neumark & Wascher, 2004).

The minimum wage may also lead to inflation of the prices. When the supply of money available to the employees is increased, the prices will also increase. As a result of this, numerous enterprises will upsurge the prices of various goods and services. Since the people have enough money to spend, the businesses often take advantage of such circumstances and increase the prices of goods (Dube, Lester, & Reich 2010). Due to this, the workers tend to lose their wage gains to inflation since the market prices are high and require more money to buy the same amount of goods.

When the minimum wage is increased, the employers may decide to reduce the size of the employees working in a company or change the working hours. When the working hours are changed, the employees are negatively affected. When the managers decide to fire the employees, the cost of business is reduced, and the employees lose their jobs (Meer & Jeremy, 2015). To illustrate this point, take this instance, a firm has allocated $100 per hour to pay the employees. As such, this is the only money that the company is left with after dealing with the other costs. Thus, the firm has ten employees who earn a minimum wage of $10. When the minimum wage is suddenly increased to $20, the business has some options to adapt to. It can cut the working hours, cut the workers, or raise the prices. Neumark (2016) asserts that hen the hours are cut, the workers will earn less money

When the employer decides to reduce the workers, in such a scenario, the wage is $20 instead of $10. Thus, initially, it was 100$/10 employees which is equal to 10 employees. The current situation is 100$/20 employees which is equivalent to five employees. From this scenario, it is evident that 50% of the workers will lose their employment. This increases the unemployment rates (Neumark, 2016).

Effect of Increasing Minimum Wage on the Employers

Neumark (2016) pointed out that the labor market is a complex field. Therefore, the employees have different skills. Thus, when the minimum wage is high, the employers hire few low-skilled employees and numerous high-skilled workers. This replacement of low skilled labor with the high skilled one does not primarily translate to employment losses unless the scholars focus on the least experienced employees whose earnings are elevated by the minimum wage (Neumark, 2016). However, from a policy angle, fewer job opportunities for the less experienced workers are the most significant since they are the individuals whom the minimum wage is proposed to offer assistance.

Many employers rely on unskilled labor. When the wages are increased, the abilities of the managers to negotiate wages for the lowest-level employees are eliminated. As such, the businesses that rely primarily on the unskilled labor assert that the increase in minimum wage increases expenses and decreases their profit margins. Therefore, they see this presenting a challenge to the growth of the business (Neumark, 2016).

When the minimum wage is higher than before, the cost of doing business is also increased. To sustain the growth in the minimum wage, the employer is forced to raise the prices, cut working hours, or reduce the number of the employees as discussed above. When the cost of doing business is increased, this does not translate to increase in production. To accommodate the new increase in the cost, fewer products are purchased, and this affects the business (Neumark, 2016).