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Running Head: MINIMUM WAGE

19

Minimum Wage

Minimum Wage:

The Good, The Bad and The Ugly

John Doe

December 2016

Kent State University

In the 19th century, Karl Marx argued that workers all around the world were oppressed by the modern form of the economy and urged employees to unite forces globally. But it would be the capitalistic nation that would actually pass a minimum wage law in 1938, setting a floor for blue collar payments. Since then, an ongoing debate between scholars has formed both arguments in favor of the minimum wage increase and arguments against it. Now it seems that neither party poses an absolute truth and that minimum wage policy requires a more ambivalent approach.

History

The term “Invisible Hands” was used by the famous economist, Adam Smith, to explain the economic phenomena in which a natural equilibrium is achieved between supply and demand (Kaufman, 2016). However, this failed to explain the harsh reality in 1929, when the U.S economy fell into the Great Depression. A new approach was then suggested by another British economist named John Maynard Keynes. Following his theory, the American government became more active in the economy and in 1938 the Fair Labor Standards Act (FLSA) was passed. This was the first time that the American Congress had established a minimum wage across the country at the rate of $0.25 per hour. President Roosevelt had announced the following: “Except perhaps for the Social Security Act, it is the most far-reaching, far-sighted program for the benefit of workers ever adopted” (Reich, 2013).

Over the years, the minimum wage has been increased only through congressional passing since it is not tied to the inflation rate (see appendix: table 1). According to CNN Money, at its peak in 1968, the minimum wage was set at $10.86 in today’s terms. However, its purchasing power did not follow the same direction, leaving less “items in the basket” compared to the past, for those who earn minimum wage today (Time Magazine, 2014). ABC News explains that some states have decided to increase their minimum wage above the federal level, with Seattle paying the highest rate of $15 an hour. So before other states decide whether to increase minimum wage or not, it important to asses its positive and negative effects on society, economy and the workforce itself.

CONS

Chicago School (of Chicago University) has been long known for its opposition built of famous economists that developed arguments against minimum wage increase. One of them is Milton Friedman, who was quoted saying: “The consequences of minimum wage laws have been always wholly bad. We have increased unemployment and increased poverty” (Kaufman, 2016). Milton is following the implication of the theory behind the supply and demand forces. Basically, an increase in labor wages will shift the demand, making unemployment go up. According to the Economist (2015), we live in modern times where increasing minimum wages would actually hurt the low skilled workers. It argues that automation and technology will be more cost effective once minimum wages are rising. This would lead to replacement of workers by machines in different industries, including receptionists, warehouse workers and more. This is true for developed countries such as Britain, but what about undeveloped countries? It turns out that they too face challenges in raising minimum wages (Gindling, 2014).

In his study, Gindling (2014) examined the reduction of poverty in developed countries due to minimum wage increase. His findings suggest that a higher minimum wage will not reduce poverty in cases where legislation is not sufficient or minimum salary is the secondary income in non poor families. Also, in case of an increasing minimum wage, poverty could scale upward if there are no government programs to support job losses. Holzer (2015) suggests a different perspective that reinforces the above. In his article, Holzer argues that a minimum wage gap between different areas such as cities and suburbs, will cause employers to relocate their businesses to where wages are lower. This in turn, could enhance poverty within the inner cities like it happened during the 1950’s (Fusfeld, 1970). Therefore, poverty threatens not only undeveloped countries but wealthy ones as well.

Socially speaking, it seems at first as if an increase in minimum wage could close the gap of inequality within a society. Logically, everyone is better off with more money coming in. But in reality, a different approach by Williams (2011) claims that a minimum wage increase will actually discriminate workers like the African Americans. Once the minimum wage level is up, a non economic criteria will overbear the economic one. He explains that since both white and black employees are equally even in terms of labor cost, a discrimination against the black employee might take place in the hiring process leaving more black workers outside of the system.

It seems then, that low skilled workers will suffer the most from an increase in minimum wage as supported by other scholars too. Schmitt (2015) explains that by determining a higher minimum wage, employers will be motivated to set a higher entry bar, leaving less skilled workers outside of the workforce. He uses the findings from Neumark and Wascher (2008) to point out that job training for some of these workers might be cut out too since employers would want to lower their expenses. And a different study by Lopresti and Mumford (2016) found that small minimum wage increase actually harms the salary rate growth for low wage employees.

But will workers be the only ones to pay the price of a higher minimum wage? It turns out that the answer is no. Looking at different studies, Schmitt (2015) concludes that with higher wages to pay, employers could increase prices to roll over the burden to the customers. In their study, Aaronson, French and MacDonald (2008) point out that a salary increase in restaurants will push the prices up with almost the same magnitude. Even if the price changes are small as suggested by Leoms (2008), the overall impact on the business can be relatively significant.

In addition to ongoing competition challenges many businesses are facing in our globalized economy, an increase in minimum wage can suppress the organization itself. In their study, Draca, Machin and Van Reenen (2011) concluded that the profitability of a firm went down once payrolls were sharply increased. It makes sense as some business owners are limited in their ability to expand revenue to meet growing costs, leaving less profits available. For experienced workers, a raise in their low skilled coworkers’ salaries can have a negative impact on their income. Schmitt (2015) points out that a survey among employers found that they will hold back benefits or bonuses for their experienced employees in case of a minimum wage increase. This shows that an increase on one side of the employment spectrum can hurt other one and it does not benefit all equally.

In fact, raising the minimum wage will not have the same effect on those who earn it. The Economist (2016) points out that most of the minimum wage workers are not the first income in their household. In reality, many of them are teenagers and less than 15% are actually from poor families. Therefore, once minimum wage is increased, its benefits would go mostly to the upper class, leaving the poor with limited gain. Neumark (2014) describes the overall negative impact on employment, by repeating the old notion that low skilled force is largely vulnerable to minimum wage changes as it cuts the number of available jobs.

So by looking at the arguments above we might conclude that minimum wage should be left untouched. But the economic theories ignore some personal stories like the struggling uneducated guy or the old widow who fights for a decent living despite their minimum income. The macro level is in a constant struggle with micro one, and between the two the later losses. Statistics do not give voice for some who desperately search for relief.

Who then will be interested in getting active and involved in such economic manner when obviously there are well established scholastic arguments? It is quite often that other variables come into place in the long ongoing debate regarding the minimum wage. Politicians find it useful to address the topic and perhaps advocate in favor of raising the minimum wage, and others argue against it in the name of the true economic sense. No matter which side you are, one thing is certain: minimum wage is not left to be self-determined.

Across American history, the government interfered and constantly raised the minimum wage, going from $0.25 in 1938 to $7.25 in 2009. Table number two (see appendix), which was taken from The Department of Labor website, shows that minimum wage only went up and was adjusted every couple of years. No doubt then, that there is some justification for increasing it. The supporting for such acts can be found at independent academic findings.

PROS

In 2015, President Obama urged the Congress to raise again the minimum wage, claiming that it is unbearable situation for families with such income (The Washington Post, 2015). An interesting argument suggests that an increase of the minimum wage can actually stimulate economy. In their study, Hall and Cooper (2012) found that an increase from the current level to $9.80 per hour, will result in growth and the creation of 100,000 new jobs. Workers will be able to spend more and this in turn will compensate the firms for their increased expense (Schmidt, 2015). Not only that new jobs will be created but the GDP (Gross Domestic Product) will rise as well. Schmidt (2015) presents a research by Aaronson and French (2013) that shows an increase of 0.3% in GDP due to a greater household spending. Indeed, table number three (see appendix) proves that developed countries are planning to expand the minimum wage in the future.

Again, does the same apply for less developed countries? Although previously mentioned with arguments against raising the minimum wage, Gindling have also provided reasons for raising the minimum wage in developing countries. First, if the minimum wage earners are the head of the family then poverty will be reduced with higher minimum wages. Second, different sectors will overall benefit from a rise in minimum wage which in turn will reduce poverty. Finally, a social guarantee for the unemployed can be effective against poverty once minimum wage increases.

What can the supporters of the minimum wage say against the rule of supply and demand? Well it turns out that it is not clear that a minimum wage increase results in job losses.

According to The Economist (2012), a moderate increase should not harm the job supply curve. In fact, the paper cites findings from a combined research by Dube, Lester and Reich (2010) which shows that a higher minimum rate did not affect restaurant employment. Also, the British minimum wage helped in closing the gaps among the lower 50% pay scale, causing inequality to go down especially among women.

It is important to address the employee’s personal perspective too. These are after all the people behind the statistics, the lives of many low income workers and the stories that will change with a higher minimum wage. Schmidt (2015) presents the moral perspective: a higher minimum income has an impact on the working spirit. He points out that Hirsch, Kaufman and Zelenska (2011) suggest that employers will enhance efficiency in response to an increased minimum wage. This will include higher performance standards and employees will present better motivation too. Furthermore, Sahpiro and Stiglitz (1984) claim that higher wages enhance employees’ potential loss, which in turn motivates them to preform better. Neumark (2014) adds that for many low skilled workers, an increase in minimum wage means not only a better income but also a higher job retaining.

Besides economic figures that are obviously important, an improvement in minimum wage can do more than increase prosperity. It turns out that by adding a small number to the minimum earner, an outstanding health phenomena occurs. A study by Komro et al (2016) found that when minimum wage went up above the federal level, there was a decrease in both low birth weight births and post neonatal mortality. This could mean not only a more fortunate society but a healthier one as well.

Results

Benefits of a higher minimum wage include better living and working conditions, a more equal society and seems as if it does not threaten to hurt the economy. But is it really a magical solution that one president or another can display to vanish the unfairness in life? History suggests that a cautious approach was led by policy makers to assure equilibrium is kept while avoiding risk as possible.

The truth about minimum wage increase lies somewhere in between the two sides. This can be explained by looking at some ambivalent realities. Take for example immigration: is it good or bad? The answer is that it depends. America benefited along its history from waves of immigration that helped build this country. Other parts of the world, as it was recently voted in U.K (Brexit), are against it.

A study by Martin and Termos (2015), examined the effects of minimum wage increase on emigration. They have found that an increase of $1 caused an emigration of low skilled workers. Does this benefit the local community or not? Some might say that it leaves more skilled workers in the area while other might suggest that it hurts the diverse nature of the place. Either way, it is hard to say what is better. Also, the researchers mention that an increase in minimum wage does not affect the migration of high skilled workers. Will that have a good impact overall? The locals might argue that they enjoy from a high percentage of skilled labor. But on a national level, some might argue that it stops other areas form developing.

If western societies have set a minimum wage over time, why there are differences in their approaches? The belief is that they all should share the same understanding. However, it turns out that strategy varies between countries such as the U.S and Britain (see appendix: table 4). According to The Economist (2012), the latter has adopted more gradual approach, where the minimum wage is increased in small incremental over time. Whereas the U.S government increased the minimum wage sharply and infrequently. The paper suggest that the British approach makes it easier for firm to adopt to the wage changes.

Conclusion

The minimum wage was established as a formal way of guaranteeing sufficient income for the low skilled workers. As a result, advocates and opponents have debated over the years regarding the need for minimum wage and its level. Those in favor suggest that it will be essential for the workers, who will strengthen the economy and society. Others claim that it will harm those who are the most vulnerable in the economy, leaving them with less jobs available. Neither party had gained control over the other and gained a majority of supporters. It seems that each side offers both advantages and disadvantages. It might be wise for policy makers to not rush into the populist option or remain too conservative. Instead they should asses the environment, look for advises and consult with peers around the globe. At the end of the day, it is important to keep in mind that minimum wage is sometimes the maximum wage for those who earn it and their voice should not be forgotten. However, they and others might be better off with a more holistic approach that looks for a better economy overall and is not focused solely on wage.

Appendix:

Table 1.

Table 2.

JAN. 1, 1978	$2.65 for all covered, nonexempt workers
JAN. 1, 1979	$2.90 for all covered, nonexempt workers
JAN. 1, 1980	$3.10 for all covered, nonexempt workers
JAN. 1, 1981	$3.35 for all covered, nonexempt workers
APR. 1, 1990	$3.80 for all covered, nonexempt workers
APR. 1, 1991	$4.25 for all covered, nonexempt workers
OCT. 1, 1996	$4.75 for all covered, nonexempt workers
SEPT. 1, 1997	$5.15 for all covered, nonexempt workers
JUL. 24, 2007	$5.85 for all covered, nonexempt workers
JUL. 24, 2008	$6.55 for all covered, nonexempt workers
JUL. 24, 2009	$7.25 for all covered, nonexempt workers

Table 3.

Table 4.

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10.3368/jhr.43.3.688

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Thesis statement: Since neither party poses an absolute truth, the minimum wage policy requires a more ambivalent approach.

Outline

Minimum Wage: The Good, The Bad & The Ugly

By Sam Esterlit

I. Introduction

A. Minimum wage – a revolutionary idea.

B. History of the minimum wage.

C. Trends in minimum wage

II. Cons

Milton Friedman and the supply-demand forces.

C. Minimum wage in developing countries.

Minimum wage as form of discrimination.

D. Workers will pay for a higher minimum wage.

E. Minimum wage increase burdens costumers.

F. Minimum wage increase suppresses businesses.

G. Minimum wage increase does not benefit solely the poor.

H. Transition and government involvement.

III. Pros

1. Minimum wage increase can stimulate economy.

E. Minimum wage increase could help developing countries.

F. Minimum wage can increase jobs.

D. Minimum wage increase will benefit employees.

E. Reduction in infant mortality.

F. Developed countries aim towards increasing minimum wage.

IV. Results

1. An ambivalent reality.

H. Emigration of workers and social movement.

The American approach compared to the British one.

D. Minimum wage ranking.

V. Conclusion

1. Both sides are right.

1. A holistic approach is needed.

Questions:

1. What is the writer’s opinion? What information was in the introduction? How could you tell?

2. What is the social issue the writer is arguing?

3. What are the pro’s of the social issue? How could you tell?

4. What are the con’s of the social issue? How could you tell?

5. How many tables were used in the paper? How could you tell?

6. How was the information from the tables addressed in the body of the paper? How were the tables cited in the body of the paper?

7. How many sources did the writer use for research? How much support did the writer use in the body paragraphs?

8. How did the writer conclude the paper?