Economics: The Employment Effects of the Minimum Wage
Over the years, economists have argued for the fact that the imposition of a minimum wage higher than the market wage would initiate a reduction in employment as well as bring about an increase in unemployment particularly among young and relatively unskilled workers. This is especially true to the workers the minimum wage aims at helping (Card et al. 491). Some economists, however, have claimed that there is no evidence of a significant employment-reducing impact attributed to the minimum wage especially on low-wage workers and that, in some cases; the hiking of minimum wage might even have caused an increase in employment. This paper will critically evaluate these competing arguments regarding the outcomes of the minimum wage on employment through focusing on the issues raised from each side of the argument (Card et al. 491).
To start with, the potential benefits associated with high minimum wage rates emanates from the higher wages for affected workers. Some of these workers come from poor backgrounds earning less income. Hence, when the minimum wage is high, it may discourage workers from using their low wages whereas the minimum wages are meant to help the low skill workers. The application of minimum wages was put in place with the intention of ensuring that a minimal standard of living, unintended consequences undermined its effectiveness. However, there has been increased evidence which shows that an increment in the minimum wage brought about by job destruction. Consequently, higher minimum wage leads to perfectly competitive employers cutting employment. In the United States, the minimum wage was developed during the Depression period where it has significantly increased from 25 cents to $ 7.25 per hour since 1938 (Card et al. 491). This increase has been criticized by some economists to bring about negative effects to the low skilled employees in terms of deteriorating businesses, increasing prices and is counterproductive for the poor working class people. Collectively, these effects bring about unemployment.
Most of the employees working under the minimum wage rate entail young people under the age of 25 years who represent about one fifth of the workers paid per hour. Most of the employed teenagers who get paid per hour, approximately 23 percent, were found to be earning a minimum wage or less as opposed to the workers above the age of 25 years (Card et al. 493). Some economists have argued that the competitive nature of low-wage industries suggested that the displacement of low-wage would bring about a more likely outcome. However, criticism over this argument occurred with responses that suggested that the competitive wage determination was inconsistent with existing business practices as reasoning about labor markets in terms of commodity markets would seem to be an important explanation for erroneous conclusions on matters such as the minimum wage (Card et al. 493). These aspects will form the basis of this paper through discussions on either side of the intensive debate regarding the minimum wage issue and its effects to employment. This discussion will occur through evidence based research conducted by economists on these effects of minimum wage (Card et al. 493).
Arguments against suggestions that increased minimum wage brings about unemployment
According to research in this area, an increment of about 10 percent in the minimum wage was found to reduce teenage unemployment by about three percent. This argument is described through the end-result of minimum wages through the employment elasticity, which describes the ratio of the percentage change in employment to the percentage change in the legislated wage. The ideology behind this reasoning occurs through the illustration that a 10 percent hike in the minimum wage lowers employment of the affected group by about 1 percent when the elasticity is -0.1 and by 3 percent when the elasticity is -3 (Neumark, 356). Evidence for industries such as the fast food has been used in the attempt explain the results associated with an increase in minimum wage rate to employment especially to young adults and teenagers. These studies have engaged in the comparison of the outcomes in the fast food industry to those in the bordering state of Pennsylvania where wage laws remained the same even after the New Jersey law brought about a rise to the minimum wage (Neumark, 356).
This study portrayed the fact that New Jersey minimum wage rate brought about increased employment as well as constructed a wage gap measure equal to the difference between the initial starting wage and the new minimum wage for restaurants involved in fast-foods in New Jersey and equal to zero for those in Pennsylvania (Neumark, 360). The increase in employment opportunities brought about significant results regarding growth on employment in New Jersey with an estimated elasticity of 0.73. These studies were coupled with the comparison of employment growth at stores based in New Jersey which were initially paying high wages but remained unaffected by the new law to changes in employment at lower wage stores. Apparently, the stores that remained unaffected by the minimum wage portrayed similar employment growth to those in Pennsylvania as opposed to the stores that had to increase the wages as well as their employment (Neumark, 360).
The reasoning behind this entails the fact that an increase in the minimum wage rate brings about a reduction in employment to the profit-maximizing employers as it involves extra costs to sustain the employees. However, for the employers incurring higher minimum wages, the employment of another employee would lead to the increase of wages for the other employees as the high costs would be diverted to the customers. Studies conducted with the comparison of 410 restaurants in New Jersey and Pennsylvania indicated an increment in the minimum wage rates from $ 4.2 to $ 5.05 occurred during a recession where unemployment rates in New Jersey had risen substantially (Neumark, 362). The effects obtained from the increase in minimum wage were thus not propagated by the rising economy. This is coupled with the fact that New Jersey comprises of a relatively small state within an economy that closely relates to its nearby states. In this case, the variation in wages within New Jersey allowed the comparison in experiences of high-wage as well as low-wage stores in New Jersey through testing the validity of the Pennsylvania control group (Neumark, 362).
Apparently, the challenge in the model applied to the competitive model is that it was wrong and some economists argued that there could be instances of monopsony in labor markets due to the frictions that tie workers to specific forms. These frictions indicated that in any instance when employers hired more workers, the cost of existing workers would also increase. Resultantly, employed based on the market may at times fall below the economically efficiently competitive level thus making the minimum wage to bring about higher chances of employment (Neumark, 339). In this case, the stores involved in high wages in New Jersey were largely unaffected by the minimum wage as the effects were brought about by worsening of the economies. This saw an increase in employment between 1991 and 1993 as the rise in unemployment would be expected to lower fast food employment in the absence of other factors. The basic ideology behind these findings indicates that firms in a low-wage region are more likely to respond to an increase in the minimum wage through having the owner pick up more hours on their own and cutting back on the employee overtime hours. On the other hand, large firms might also attempt to squeeze more work out of the managers under salaries as well as hiring more part-time workers with the aim of avoiding benefit obligations (Neumark, 339). Consequently, most employees may get to keep their jobs at the high mandated wages due to aspects such as trust or loyalty or simply due to the desire of avoiding the implications of restructuring business operations to account for fewer workers. This is prevalent because employment opportunities have a social dimension that does not rely on economic endeavors (Neumark, 339).
It is also important to note that low wages bring about effects to other sectors other than the employees as studies have indicated that workers at fast food restaurants such as McDonalds as well as other major restaurant chains, use federal and state programs at far higher rates that other workers. Most of these costs are met by the people in the society as an increase in the minimum wage shifts some of the burden to the private stakeholders (Neumark, 339).
Arguments for suggestions that increased minimum wages brings about unemployment
According to economic research conducted on the effects of the minimum wage, the employees within an organization who get to retain their jobs are simply made better off at the expense of unskilled workers who are mostly young adults who get laid off. The increase of the minimum wage rate brings about an attractive appeal to new entrants who seek the job opportunities even without the guarantee that they will get them (Neumark, 354). In instances where the minimum wage rate goes beyond the prevailing market wage, most workers lose their jobs or get limited working hours. This is especially true with evidence indicating that a 10 percent increase in the minimum wage rate may bring about a 3 percent decrease in employment of low-skilled workers. Economists arguing for this ideology have suggested that employers have the option of finding alternative ways of economizing on the higher-labor prices as factors such as the introduction of new technology as well as labor saving capital investment tend to replace the unskilled workers. The belief that there will be an increment in the minimum wage increases these substitutions thus bringing about more skilled workers and few job opportunities for the low-skilled workers (Neumark, 354).
Eventually, the minorities will be entitled to high unemployment rates due to the fact that participation rates will decline as workers affected by the minimum wage tend to drop out of the formal labor market. In this case, researchers have argued that the increase of minimum wage violates the principle of freedom through limitations to the range of options open to workers. These limitations prevent workers from getting involved or taking part in job opportunities offering less than the legal minimum. Additionally, they suggest that the minimum wage hinders employers from employing workers regardless of whether they would have brought in more advantages (Neumark, 354).
In this case, economists arguing for this perspective have indicated that if low-skilled workers lose the jobs, their income becomes zero. At this juncture, employers fail or rather hesitate to pay their employees higher minimum wages if they lack the ability to produce at least the same amount. Studies have also indicated that employers seek to benefit in terms of profits through higher minimum wages in which they employ workers with better skills and qualifications. This leads to other employees losing their jobs and remaining unemployed as there are no employers willing to employ them at the above market wage (Shouhai, 183). In addition, the increase of minimum wage leads to employers increasing the prices of their commodities in order to cover other expenses. However, in doing so, they push the obligation of meeting these expenses to the consumers who in turn buy less of the commodities or have less money to spend. Eventually, the employers are left with less money and as a means of recovering this money, the low-skilled workers are laid off and more skilled employers are brought in to meet the value of the minimum wage they receive through their output (Shouhai, 183). Basically, the whole concept behind this ideology implies that the most prominent employment effect brought about by minimum wage laws occurs through a decline in the hiring of new employees. This is prevalent through the way employers shift their focus to methods of saving labor of production (Shouhai, 183).
Studies conducted to determine whether an increase in minimum wage in New Jersey adversely affected the rate of employment in the fast food industry indicated that the increase in minimum wage rate brought about an increase in job opportunities for low-skilled workers. However, this argument was criticized by other economists who suggested that the study only focused on franchise restaurants such as McDonald’s without paying attention to smaller organizations that are significantly affected by the increase in the minimum wage (Shouhai, 183). The study was criticized for ignoring the employees who lost their jobs through focusing on those who retained their jobs on higher minimum wage. In response to the ideologies raised, proponents of the minimum wage suggested that deep focus should have been given to the workers lost their jobs in order to identify with the law of demand (Shouhai, 183). Evidence also indicates that the increase of the minimum wage from $5.15 in 2007 to $ 7.25 per hour brought about an increase in unemployment rates as it occurred during the recession period. It saw about 29 percent of black teenagers losing their jobs or lack employment opportunities as opposed to white teenagers. Conclusively, the increase in minimum wage brings about a decline in employment opportunities as most employers seek skilled workers who will bring in more skills and hence profits to the organization (Shouhai, 183).
The increase of minimum wage rates brings about imbalance in the labor market as employers seek to get the skilled employers whom they are willing to pay the given minimum wage with the hope that they will substantiate with an equivalent production. In this case, they lay off the unskilled workers who would have worked at lower minimum wages and thus render them unemployed (Card et al. 489). However, instead of laying them off, they should choose amongst the unskilled workers, retain them in their posts but reduce their benefits as well as working hours. Similarly, they may also choose to substitute more skilled workers with low-skilled workers with the aim of reducing the costs incurred (Card et al. 489). This should occur through the adoption of labor-labor substitution as a way of responding to higher minimum wage in the long run. Consequently, retaining low-skilled worker at higher minimum wages would bring about increased productivity among the workers and in turn reduce poverty (Card et al. 489).
Additionally, more emphasis on current research should be directed towards the workers who have lost their jobs as a result of increased minimum wage. This way economists and researchers would get different perspectives of the effects brought about increase in minimum wage. Although many studies have indicated that there is limited evidence regarding the effects of minimum wage, it is imminent that through the issues discussed in this paper portray distinct perspectives regarding minimum wages to employment (Card et al. 489). However, it depends on the employers in the market as they determine the employment opportunities they should offer based on the market trends as well as issues raised by government. Governments should thus intervene to offer minimum wage floors to organizations with an attempt to solve the unemployment menace. In addition, economic conditions and factors should be applied and deeply considered in order to initiate stronger effects in reducing unemployment brought about by minimum wage (Card et al. 489).
Card, David, Katz, Lawrence F. and Krueger, Alan B., “Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws: Comment,” Industrial and Labor Relations Review, April 1994, 47, 487-96, http://www.nber.org/papers/w4528
“Effects of Raising the Minimum Wage: Research and Key Lessons Journalist’s Resource.” Journalist’s Resource. N.p., n.d. Web. 21 Apr. 2015. <http://journalistsresource.org/studies/economics/jobs/the-effects-of-raising-the-minimum-wage#>.
“Evidence on Employment Effects of Minimum Wages and Subminimum Wage Provisions From Panel Data on State Minimum Wage Laws.” NBER. N.p., n.d. Web. 21 Apr. 2015.
Neumark, David. “The Employment Effects of Minimum Wages: Evidence from a Prespecified Research Design The Employment Effects of Minimum Wages.”Industrial Relations 1 (2001): 333-417. Print.
Shouhai, Ding. “Employment Effects of Minimum Wage Regulation and Cross Effect of the Employment Contracts Law.” Social Sciences in China 2 (2010): 171-249. Print.