This paper examines the concept of minimum wage from an Economics point of view. In doing this, the paper will begin by defining the concept of minimum wage and its corresponding meanings. This will be followed by an assessment of the history of minimum wage with an emphasis on the United States.
The paper will go further to assess the effects of a revision of the minimum wage to employers then to employees. This will lead to an assessment of the positive effects of minimum wage as well as the negative effects of minimum wage.
Definition of Minimum Wage
The minimum wage is the lowest level of pay that an employer can pay to the employees as stipulated by law. It is defined by the International Labor Organization as “the lowest level of remuneration … which each country has the force of law and which is enforceable under threat of penal and other appropriate sanctions. Minimum wages fixed by collective agreements made binding by public authorities are included in this definition”.
This indicates that the minimum wage is the level of pay or compensation given by employers to their employees as stipulated by the laws of the land. The minimum wage is included in the laws of a given nation and it has the force of law. Hence, if an employer decides to pay his employees below the lowest minimum wage level, the government and law enforcement authorities can take action against the employer and subject him to prosecution.
The minimum wage include wages that are fixed by collective agreements. This include various interest groups and stakeholders who come together to fix the minimum wage through various agreements. Once the government gives it the assent, it becomes law and no employer can pay a salary below the minimum wage.
The minimum wage is the price floor that sets the minimum hourly rate for employees. The minimum wage is meant to promote equal opportunities in a country and help to bridge the gap between the rich and the poor.
There are two main implications of the minimum wage. First of all, it is a way of fighting poverty because it guarantees the price floor, below which it would be illegal to pay an employee. In other words, it prevents employers from exploiting the extremely poor people in society. This is because such persons are vulnerable and are willing to do almost anything to get paid and to survive. Hence, they are susceptible to manipulation and exploitation by the rich employers. Due to this, the minimum wage is seen as a tool that is used by the government to prevent the poor and the less skilled from being exploited by the rich capitalists and business owners.
On the other hand, it can reduce employment amongst the low-skilled since there is the tendency that businesses would fold up when they are forced to pay a minimum wage. In effect, there is the risk that more low-skilled persons could get out of work due to the minimum wage. Thus, a government would need to blend the two implications and come up with an appropriate minimum wage that would protect the rights of the extremely poor in society and also prevent job losses in the economy.
History of the Minimum Wage
The minimum wage was established in the laws of the United States through the Fair Labor Standards Act (FLSA) of 1938. This law is described as the basis and the bedrock of labor protection regulations and social welfare provisions for the less skilled workers. This is because it came into force to protect the American people who were less skilled and stood the greatest risk of being exploited by their employers. In effect, the Act was issued to protect the least powerful section of the United States' society. This protected them from exploitation by their respective employers.
The FISA was meant to cover full time and part time workers in private sector, federal, state and local government positions throughout America. This means that the Fair Labor Standards Act (FLSA) of 1938 was designed to have a universal application and it was meant to promote fair and equality in the workplace throughout the country. When FISA came to force in 1938, it stipulated that the minimum hourly rate of the United States should be set at $0.25 per hour. At that time, the minimum wage prevented employers from going beyond the $0.25 per hour mark. And this was unprecedented at that time. However, it increased to $0.30 per hour in 1944 and then to $0.40 per hour in 1945.
The practice in the United States is that the minimum wage is changed by Congress and the Presidency and the changes are normally due to two main factors. The first involves a severe change in the cost of living. This is often the case where there is a major increase in prices in the country. At such a point, the only way of ensuring that there is some kind of social justice is to increase the minimum wage.
The second reason why minimum wage might increase is often due to electoral conditions which require changes. In other words, there might be the need to opportunistically increase the minimum wage to woo voters and get them to become more interested in the ruling party.
In the United States, the regulation of the minimum wage is done by Congress. However, it is influenced by strong lobby groups. There are groups that represent employers and groups that represent employees. These groups argue, debate and lobby in order to justify or reject a given change in minimum wage. These debates are transposed to Congress where there are Pro-Working Class and Pro-Employer Class officials who argue over how to fix the minimum wage. In most cases, these arguments are set in motion by the respective committees in congress.
Basically, the motive for the fixing of the minimum wage is to use it as a tool for poverty alleviation. This is because most of the Americans who live below the poverty line are those people who have low skills and are most susceptible to manipulation and exploitation by employers. Due to this, the government believe that if such persons are protected from exploitation, they will rise above the poverty line and live a meaningful life like other Americans.
On the other hand, others argue that the minimum wage is not robust enough to promote the redistribution of wealth or prevent job losses. Due to this, the minimum wage is criticized and those in the employer category often warn that the minimum wage would jeopardize rather than help improve the conditions of people in the lowest categories of the pay structure of these businesses.
In 2003, the minimum wage was $5.15 per hour. However, the minimum wage in the United States currently stands at $7.25. These figures are not stable and are regularly subjected to change. In the past, these changes almost invariably leads to the increment of the minimum wage, rather than its decrease. This is often pegged with inflation in the economy and changes in prices of goods and services. The idea is to review the minimum wage in such a way that the individuals earning such a salary can have a decent life and can afford their basic necessities.
However, any time minimum wage changes, it has an impact on both the employer and the employee. The minimum wage could have various levels of impacts. The next section discusses these impacts.
Effects of Revising Minimum Wage on Employers
Employers are in production to make profits. Hence, employers seek to maximize returns and revenue whilst they minimize costs of their operations. Thus, employers do everything possible to increase the prices of their goods and services and also reduce the costs of running their businesses.
Labor costs are significant costs on the budgets of employers. Paying workers is significant and there is always a quest to cut down on labor costs. In the situation where the minimum wage rises, employers' payroll costs increases. This is because they cannot continue paying the old salary if it is below the new minimum wage. Due to this, they have to increase their wages and this will cause their costs of operation to increase and this will invariably affect profitability of their business.
From another angle though, the people for whom the minimum wage is meant to protect are people with low skills. Since such persons are abundant on the labor market, there is high competition for their job slots. Due to this, employers have the capability to manipulate them. This therefore leads to a situation where the employers cut down the job slots for people with low skills and then get those who remain to work extra hours and extra hard. In other words, they find ways of getting the remaining employees to do what the other employees were doing. For instance, if a company had 30 cleaners and each cleaner covered 10 meters square of floor each day and a minimum wage is announced that is above what was being paid by the company, there is a natural tendency that the company would lay off say 10 of the employees. This will mean that there would be 20 employees however, the floor space to be cleaned will remain the same. In this case, the extra work would be distributed to the remaining employees and this will mean that they would have to clean 15 meters square each day for a higher pay. They would therefore have to work extra hard and this might go against the quality of work that they would do.
On the other hand, there would be 10 extra people who would be unemployed because of the new minimum wage law. These ten extra employees would have a tough time finding a new job because other companies would also be laying off their workers. This would mean that the level of aggregate unemployment would rise in the country and employers would not be able to do much about the situation.
Effects of Revising Minimum Wage on Employees
Employees on the other hand benefit from the minimum wage in the normal sense. This is because they get satisfied and feel protected by the law. Due to this, they are more likely to remain motivated by these changes.
Secondly, employees get some degree of job security and protection from exploitation by the changes in minimum wage. However, they risk losing their jobs and being laid off if the minimum wage is too high for their employers to pay.
Positive Effects of Minimum Wage
The first effect that minimum wage has the advantage of improving life for the poorest people in the country. This is because it protects the poorest members of the society and the people with the lowest skills in the society.
Secondly, the minimum wage encourages hard work and is a motivator for people working in the most undesirable positions. This is because the minimum wage indicates to the workers that their employers have some degree of respect to them. This gets them to work extra hard and put in more effort to attain better results.
The minimum wage ensures that all members of the society get a good and a fair amount of money as remuneration. Due to this, the minimum wage has the ability to increase consumption and improve the purchasing power of people in the society. This enables the economy to grow and expand since more and more people can afford to spend more money and this improves businesses since demand increases when there is a minimum wage and this increases further when the minimum wage is increased further.
The minimum wage also creates some kind of psychological booster for businesses and for employees. It helps to streamline work ethics and presents an employer in a favorable light. This is because an employer is seen to be giving the employees a fair remuneration and this helps to improve the image of the employer. Also, the employee gets some degree of respect and this enables the employee to work in a more serene and friendly work environment.
When the minimum wage is in place, the government would not have to spend too much money on welfare. This is because the poorest in the society can work and earn a decent living. Due to this, they would not have to rely on welfare and food stamps. Rather, they can raise enough money to take care of their bills and have a respectable life.
The minimum wage also encourages legal employment. This is because the minimum wage guarantees a fair amount that the least skilled employee would earn. This creates a situation whereby people would want to work rather than engage in something illegal. In other words, the minimum wage removes the tendency to argue that the salary for an honest job is way too low. And if the reward for honest employment is significant and huge, people are likely to turn their backs on illegal jobs and do what will bring them income legally.
Negative Effects of Minimum Wage
The minimum wage has its downsides. First of all, it discourages effort. This is because the minimum wage is guaranteed and due to that, some people might not be encouraged to work hard on the job since they would get a salary at the end of the day. Additionally, some people might not be eager to improve their skills and competency due to the minimum wage. And if it is high, such persons would be more than happy to live on the minimum wage and have a mediocre life.
The minimum wage increases wage costs and this leads to the need to lay off workers. This causes people to lose jobs and can lead to serious misery for a few low-skilled workers whilst others enjoy a disproportionately good life.
Minimum wage destroys small businesses since it can make it impossible for start ups to employ other people. These businesses might have to fold up due to the high labor costs.
Other methods of promoting welfare and helping the poor could be desirable and much better than the minimum wage. This is because some arrangements like tax cuts will relieve the burden on employers to pay a huge minimum wage but at the same time allow poor employees to get an enjoyable life. This approach is better from a productivity point of view because it helps the employers to also get the highest levels of profits and keep the poor employees happy.
The minimum wage is the lowest rate that can be paid to employees. It is backed by law. The minimum wage in the United States was introduced by the Fair Labor Standards Act of 1938.
When the minimum wage is increased employers might have the need to lay off workers and get existing workers to work extra hard in order to meet their profit targets. Employees on the other hand benefit and get a better life. However, lay offs can lead to high unemployment levels.
The advantage of the minimum wage is that it improves the lives of the poorest people int eh society, increases motivation amongst unskilled workers and promotes ethics and respect. Minimum wage means that the government has to spend less on welfare and it promotes legal employment ahead of illegal activities.
The disadvantage of minimum wage is that it discourages effort and there is always the need to lay off workers if employers find it to be too high. Minimum wage destroys small businesses and there might be other better methods of dealing with the poor and low skilled in the society
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