Minimum Wage: Costs and Benefits

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Information about Minimum Wage: Costs and Benefits

Published on March 14, 2014

Author: sirvictorson



Governments of nations fix minimum wage with the aim of protecting the vulnerables of societies but is surprising that in many cases, it doesn't due to other factors.

MINIMUM WAGE: COSTS AND BENEFITS Victor Osakwe Minimum wage is the lowest permissible wage or remuneration that can be paid by an employer to its employees as required by prevailing law in a given country. According to Wikipedia, is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers. Meaning it is the least amount labours can sell their labour service[1] . There have been divergent views about minimum wage fixing both within the economics field of study and outside. The public policy of minimum wage fixing started in 1987 in New Zealand and 1986 in Australia with the aim of protecting the vulnerables in the country and guaranteeing a minimum standard of living especially for the unskilled workers and it has been adopted by over 90% of nation of the world but how well this policy has achieved the aim is still a subject of intense debate over the years. The most prevalent of these views is that of the neoclassical economics who through their graphical analysis of the demand and supply of labour service opine that increasing the minimum wage above the amount jointly determined by the interaction of demand and supply i.e. equilibrium wage will cause unemployment. The reason for this assertion is that, at minimum wage rate higher than that equilibriumly determined, more workers will be willing to offer their labour services while employers will only be offering fewer jobs as a result of the increase wage. They went further by asserting that the very group of people the government is trying to protect will end up being the affected because the increase in labour services offers experienced as a result of increase minimum wage will make firms to have more choice and be more selective in employing and in the end, workers with the least skill and experience don’t get the job. Unlike the unskilled workers, minimum wage doesn’t affect workers with higher skills because it is in most cases lower than equilibrium wage. The below graph is used to drive home the point.

As convincing the neoclassical model is, it experienced many criticisms from fellow economists. Among which are: Professor Gary Fields of Cornell University who accused neoclassical model of ambiguity and incorrect measurement of one-sector market without recourse to a two-sector market. Another criticism stern from the believe that if the vulnerable employees work in firms producing products that are highly inelastic, employers can be forced to pay the minimum wage while shifting the burden of the increase in wage on the consumers through higher product prices. This was buttressed by the empirical study by David Card and Alan Krueger in New Jersey, USA. In their study on fast food restaurants workers in New Jersey and eastern Pennsylvania in 1992 after an increase in the minimum wage from $4.25 to $5.05 per hour which is (an 18.8% increase), they discovered that employment increase’s with the increase in wage as against the popular or mainstream economics believe of a fall in employment due to the wage increase. Though a contrary result was discovered sequel to a subsequent finding by David Neumark and William Wascher to verify Card and Krueger assertion. They found out that there was a decrease in employment following an increase in minimum wage. From this contrasting view points, it will be worthwhile for government to consider costs and benefits before making and imposing minimum wage so as to ensure that the cost of job lost as a result of increased minimum wage exceeds the benefits that accrues from increased income for the unskilled or poor labour. Benefits of Minimum Wage One of the major reasons in support of the minimum wage is the fact that, it helps the most vulnerable, unskilled and poor of the societies increase their standard of living. This long held notion has made successive governments to increase minimum wage at different

times so as to compensate for the falling standard of living as a result of increasing inflation rate. Another touted benefit which the government find favourable so to speak is the believe that minimum wage will help reduce tax burden through decreases in the cost of government social welfare programs to these lowly paid workers. Minimum wage will also serve as an incentive to the unemployed to take-up jobs and work harder. This is a resultant effect when unemployed people compare the minimum wage to the government assistance. This incentive-benefit holds for nations paying unemployed benefits but for nations like Nigeria without unemployment benefit, minimum wage will induce them to be more frantic in getting a job since they are aware of the prevailing wage rate. Minimum wage also encourages increased consumption; this is as a result of more money at the disposal of the low-income group that hardly save. This in-turn increases demand and supply of goods, production; which benefits the economy at large. Minimum wage can also increase employment. Aside from the empirical analysis of Card and Krueger espoused above, employment can actually be created in the sense that, some few workers in the minimum wage bracket can see increase in minimum wage as an incentive for reduced work hours if he or she feels they have no other need to be met with the increase in total wage thereby freeing up some hours of work which can then be taken up by another unemployed or underemployed worker. Despite these good reasons in support of minimum wage law, there are other reasons discouraging its enactment or increase. These include:

Costs of Minimum Wage The most wide-held cost associated with minimum wage is that, it causes unemployment and making it difficult for people to find job. This span from the common labour market rule such that firms will be demanding for fewer workers while workers are willing to supply more of their labour services. A related cost to the abovementioned is the fact that minimum wage laws affect the manner in which workers are compensated in terms of more work effort and fringe benefits. Workers that have many fringe benefits like subsidized health and child care, on the job training, paid vacations, insurances etc inclusive in their pay package may have this reviewed down or converted to cash to augment the difference between the former wage and the legislated minimum wage. Employers may even eradicate or turn fulltime low-wage jobs into part-time high-wage jobs. Minimum wage causes cost-push inflation. This is one of the knowledge from high school economics lessons. This type of inflation will occur when firms can shift the increase in production cost as a result of increase wage to the final consumers. Minimum wage will also bring about black marketeering of labour services especially in firms, industries or nations where firms can get away with it. Minimum wage is a less effective poverty reduction scheme compared to others like basic income, guaranteed minimum income, refundable tax credit, collective bargaining[2] because it benefits some workers at the expense of the most vulnerable or poorest or least productive in the society. Minimum wage will also bring about movement of jobs from areas or nations of higher labour cost to lower labour costs areas or nation. This was the case when many US

firms are opening up branches/subsidiaries in China to cater for major productions while maintaining just administrative position in the US due to cheaper labour cost permissible in China republic. It will also bring about rural-urban drift. Lastly, it must be said that minimum wage usually affects the small businesses more than their large counterpart which may affect their profit and sustainability. Conclusion From the foregoing, it’s evident and clear that minimum wage legislation is without its negative effects or cost; even though the government meant well for the supposedly targets (low-income workers), various analysis show the inherent problems with the legislation. So it is recommended that government consider the cost and benefits of such policies or better still, adopt other means like guaranteed minimum income, refundable tax credit, collective bargaining, etc to protect or improve the standard of living of the poor in the society. References Fields, Gary S. (1994). "The Unemployment Effects of Minimum Wages". International Journal of Manpower 15 (2): 74–81. Footnotes 1. 2.

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