Minimum Wage Essay Example for Free

Minimum Wage Essay Increasing the minimum wage has been considered to be one factor that results in higher unemployment rate. Various authors on this subject outline different views on the effects of increasing the minimum wage on unemployment rate. One study shows that effect on increasing the minimum wage varies in different economies. Another says increasing wage rates does not affect unemployment rate. And, there are also studies which indicate that there is an effect although not that significant in affecting occupation loss. This paper aims to present issues that will provide clear views on whether an increase in the minimum wage results in higher unemployment rate. Wage rate is the representation of the non-existent to the slightest bargaining power of the workforce (Bernstein and Schmitt, n. d. ). Increasing the minimum wage is done to alleviate poverty. (Macpherson, 2005; Bernstein and Schmitt, n. d. ). Its main goal is to help low-wage workers uplift their income and cope up with the rising cost of living (Page, et al. , 1999). However, it has been criticized because of its ill effect on employers’ business. It has been said that an increase in the minimum wage rate would cause unemployment. There had been studies about the effects of the minimum wage rate hike, but they do not point out to one outcome. Different economies have different outcomes when subjected to minimum wage increase (Fields and Kanbur, 2005). Different countries have comparative results when an increase in the wage rate is implemented. However, it will certainly be effective for the low-wage earners. An analysis made by Burkhauser and Sabia (2005) showed that an increase in the minimum wage rate has not been effective as far as poverty alleviation is concerned because the increase was given only to low-wage earners. Other workers earning higher wage but were also within the poverty level were not granted similar increase, as such only those employed in minimum wage rate jobs were able to realize the benefits. The effect of the wage rate, in this case, does not necessarily address the needs of those with low incomes. Not all people that are in need of the wage increase are working at a minimum-wage earning occupation. Increasing the minimum wage is also believed to be favorable for the poor working men and women. However, its effects are far from helpful, in fact, increasing the minimum wage is hurtful to business and may result to unemployment. The wage hike will cause the salary of low-wage jobs to be equivalent to the salaries of those in higher job levels. Since these jobs have higher requirements in terms of skills, the least skilled are more likely to be laid off from work. A minimum wage rate hike and its effect on unemployment were seen in the study of Brown (1988 as cited by Burkhauser and Sabia, 2005). An increase in the wage rate caused a small decrease in the employment of teenagers. The decrease upheld the theorized increase in unemployment rate for an increase in the minimum wage rate. A study also showed that it is not a matter of how much the laborer is earning, the salary that a worker receives, which will improve in case of a minimum wage increase, but the employment status of the worker. These workers are more likely to be dismissed when a company suffers loss, in the form of higher operational costs, as a result of minimum wage hike. (Deere, 1998). The study further showed that not all workers earning a minimum wage rate are actually poor and may not in need of the increase (Burkhauser and Sabia, 2005). Most of the workers that will benefit from wage increase are the young workers, aged 24 or younger (Macpherson, 2005). The workers that are aged 24 or younger are mostly employed in these minimum-wage earning occupations. In addition, a higher wage would mean more interested workers but due to the surplus of workers, a crowding out would occur or less hours of work would be allotted per person. This would result to a decline in the earnings of each worker (Page, et al. , 1999). Macpherson’s study (2005) in Pennsylvania indicated that an increase in the minimum wage rate would really be costly for employers and thus, lead to mass laying-off of workers. Few firms are able to continue operation given the increase in wage rates, hence only few workers are needed. The company may retain more workers but may reduce the working hours for each employee. In both cases, the low wage earners are the ones affected because they may get the desired increase in wage but may end up spending little time for work, hence reducing their income. However, a study indicated that retail jobs are the only jobs which prove that higher minimum wage rates decrease the employment (Fox, 2006). For other firms, it would be better to engage in other programs that may promote increase in work-hours instead of increasing the minimum wage rate to motivate employees. One way to alleviate poverty is to consider the family income of low-wage earners. Extending non-monetary benefits will somehow improve the lives of minimum wage earners and can be given to them in lieu of the wage increase. (Burkhauser and Sabia, 2005). Minimum wage hikes are beneficial to workers and companies alike. It keeps the workers to stay in the company for a long time, thus developing loyalty to the job. Although granting an increase in wage to workers may add up to operating expenses of a company, still it is benefited in the long run because it will not incur cost on training new workers. Fox, 2006). Periodic grant of an increase in the minimum wage rate is needed to augment workers’ income, such that they are able to cope up with the rising cost of living. The slightest increase in their wages raises the workers’ economic well-being since it makes them more capable of financing the most basic needs of the family. This is particularly true for workers who are the heads of the households (Burkhauser and Sabia, 2005; Bernstein, et al. , 1999). An increase in unemployment is not necessarily caused by an increase in the minimum wage rate (Fox, 2006). A classic example in this theory was the increase in the minimum wage rate in the years 1996 and 1997 that did not lead to the dismissal of teenagers, which were believed to be less skillful workers (Bernstein and Schmitt, n. d. ). If the increase in the wage rate does cause a significant decrease in employment, there would have been larger decreases in the employment over the years (Card, 1992 as cited by Fox, 2006; Bernstein and Schmitt, n. d. ). Wage hike does have psychological effects on workers such as: higher productivity, decreased turnover, lower recruiting and training costs, decreased absenteeism and higher morale, which are believed to offset the costs of increasing the wage (Bernstein and Schmitt, n. d. ; Card and Krueger, 1995 as cited by Fox, 2006; Bernstein, et al. , 1999;). Increasing minimum wage rate even attracts employment (Clinton, 1995 as cited by Burkhauser and Sabia, 2005). The effect of increasing the minimum wage rate on the rise in unemployment rate is generally small and statistically insignificant (Bernstein and Schmitt, 1998 as cited by Fox, 2006). Decreases in the unemployment rate may also be caused by the wage hike, but only to a small extent. A more likely cause of unemployment is the performance of the economy (Chipman, 2006 as cited by Fox, 2006; Costales, et al. 2000), one of which is the existence of a deflationary gap. It is a situation wherein the aggregate expenditure of the economy is less than the full employment level of income or output, hence suggesting the existence of unemployment (Costales, et al. , 2000). In fact, empirical studies show that the employment on firms which implemented the higher minimum wage rates are higher than those without the raise, which both have positive and negative effects (Burton and Hanauer, 2006 as cited by Fox, 2006). The negative effects of more employment were stated in preceding pages of this report. The overall positive effects of the increase in the wage rate set a sense of value for low-wage workers’ employment and uplift their living standards. (Fox, 2006). It serves as one of the tools in poverty reduction because the primary goal of the minimum wage policy is to increase income of the low-wage earners (Burkhauser and Sabia, 2005). Raising the minimum wage rate affects employment opportunities. It makes job seekers less likely to get a job while those who are already employed are expected to retain the employment. (Deere, 1998). Firms who do not have the money to shoulder additional wages for an increase in the minimum wage rate are usually the ones who are against the implementation of wage hikes. This is the primary cause of laying off of workers and the increase in the unemployment rate. This also is the cause of firing less skilled workers because firms opt to retain the workers who are more skillful. However, if the firms are able to sustain the costs, the increase will be both beneficial to employers (moral uplifting and better performance of the employees) and to the workers (higher income for basic needs). Increasing the minimum wage of low-salaried workers is part of the bargaining agreement between the workers’ union and the company. It is given in the hope of alleviating poverty. However, study shows that it may not be true in all cases because some companies may opt to adopt work allocation among workers which could mean limited time for work meaning limited income on the part of the affected workers. Though increasing minimum wage may result in higher operating costs, the increase is not the only factor that affects the employment status of workers. Effects of increase in the minimum wage vary in different economies, hence the country’s economic performance directly affects unemployment rate due to the presence of deflationary gap. Increase in the minimum wage rate does not directly affect the unemployment rate, but rather, it affects the costs of the firms. In turn, these firms which cannot operate at a higher cost screen their current workers and cut those who have little experience to maximize their returns. However, there are firms which value the welfare of the workers and treat it as part of the working costs included in the production. Thus, they consider additional costs, resulting from wage hikes, negligible. Therefore, increasing the minimum wage does not result in higher unemployment rate.