Raising the Minimum Wage

Raising the Minimum Wage

Income of the society is always unevenly distributed among the population. Income and welfare inequality of social clusters often reaches a level when a government considers it to be its duty or is forced to fight it. Reducing inequality is possible in two ways: to reduce the incomes of the rich, for example, increasing their taxes; or raise the incomes of the poor. Traditionally, the latter category includes people receiving the minimum incomes, such as a minimum wage, a minimum unemployment benefit or a minimum pension. Since raising taxes is politically very unpopular, it is rarely used to combat inequality of well-being. In this regard, when it comes to poverty and a large gap between rich and poor segments of the population the question of raising the minimum wage arises.

The issue raising the minimum wage causes different reactions of economists. According to many of them, President Obama’s decision to increase the minimum wage by 39 percent can reduce employment of hundreds of thousands of jobs due to increased costs, which companies will want to reduce. Others argue that the negative effects on the economy, if any, will be insignificant (Lemieux, 2014). In either case, this measure alone will not solve the problem of poverty in the country and requires an accurate assessment of the positive and negative effects on the economy as well as measures to eliminate or mitigate the latter.

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Consequences and Proposals

Raising a minimum wage is a method of adjusting the real income of the population. Since the last increase in the minimum wage, the rise in prices has reduced the purchasing power of money. Another reason to make the minimum wage a subject of global concern is the welfare inequality. Therefore, the governments set up and adjust minimum wages in order to preserve a sufficient welfare of its citizens. At the same time, any government’s regulation of the economy has its consequences.

According to the economic theory, the firm hires an additional worke if its marginal profitability rate is equal to his salary: MRPL = w (Shimer, 2013). On this basis, higher wages correspond to greater worker’s productivity. In other words, the company will either require employees receiving the minimum wage or greater return or dismiss those whose marginal rate of return is lower than the new wage. The government should encourage the employment of the population who have lost their jobs as a result of its political decisions. For this purpose, it can establish educational programs promoting employees qualification, intensify the work of employment centers, conduct social marketing campaigns for enhancing work attractiveness. The proponents of the discussed measure argue that the unemployment growth will be much lower than the benefits for those who will keep their jobs (Dabscheck, 2002). However, this benefit does not solve the poverty issue. In their research, Formby and Bishop state that a significant percentage of poor households does not receive the minimal wage (Formby, & Bishop, 2010). Many of the poor do not work. Moreover, most of the people receiving minimal wage do not live under the poverty line (Sabia, J. J, 2014). Considering the poor measure targeting the reason for wages increasing is questionable (Meyer, 2010).  Together with estimated job losses, it may increase the share of poor people giving more money to other social groups.

Employees, whose work rate in the short term is below the required by employers, lose their jobs and incomes. However, in the long term, a new level of productivity will be perceived as a norm. The labor force that has appeared in the labor market for the first time will initially focus on the higher rates that within the economy as a whole will mean total increased productivity.

As one working hour will cost more for an employer, total costs will increase (Bernstein & Schmitt). The firm chooses its optimal output considering its costs and revenues. In the competitive market, costs are the only determinant of the equilibrium price. Therefore, raising the minimum wage will lead to an increase in gooods prices of companies using low-waged labor. In addition, the increased wage makes the aggregate demand higher. Without raising output, increase in demand leads to price growth.  In this regard, the effectiveness of such anti-poverty measure attenuates due to the decline in real purchasing power of the monetary unit. Therefore, the government should target the output issue as well. New work places creation may help to solve both unemployment and low output problems under the condition of wise choice of industry. A research that identifies what industries pay the majority of minimum wages would show the industries that will potentially increase their prices. Considering the costs distribution of the poor households, it is possible to find out areas of growth in demand.

Conclusion

Raising minimum wage has both negative and positive consequences. On the one hand, it increases incomes of the workers and decreases a gap of uneven income distribution in society. It is proven that employment depends on the worker marginal profitability and his/her salary, in the long run, this measure may increase the productivity and efficiency of the economy.  On the other hand, this measure is poorly targeted and has a weak impact on poverty and welfare distribution. It does not affect most of the poor as they do not receive the minimum wage. Raising the minimum wage leads to a decrease in employment, that is the opposite to the main economic goals of the government activity. As many poor are unemployed, this measure in such way increases the amount of the poor. Another negative consequence is the potential price growth due to increased aggregate demand and production costs.

Raising minimum wage alone cannot solve the problem of poverty and inequality in society. Therefore, making a decision to raise the minimum wage, the government should take into account the above-mentioned consequences and take support measures for their alleviation or elimination. It should stimulate employment in order to reduce job loss effect caused by wage increasing.

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