Recommendations
Proponents of minimum wage policies think that the policy will trigger economic growth by motivating workers and increasing productivity. Instead, the policy affects employers by reducing the level of profits and increasing the costs of doing businesses. It is, therefore, recommended that the government and policymakers focus on methods of economic growth such as encouraging companies to invest in areas that attract productivity. The government should instead encourage investment by creating favorable environment for doing businesses. This can be done through tax incentives and training programs that seek to increase knowledge and skills in targeted populations.
It is also possible that the policymakers agree with business organizations and investors on the best interventions that could help in stimulating economic growth instead of focusing on theoretical method of increasing the wages of workers. Employers and economists are the only people that are well-informed about the business operations. The government and other policymakers should listen to what the employers want and this can help in reaching mutual agreements that could help the poor and semi-skilled workers without hurting the economy.
Summary
The debate about minimum wage and its impact on the economy has been in the mainstream media for a while. Over the past decade, questions on minimum wage have revolved around the when, where, but little focus has been placed on the why part of the minimum wage policy. The “why” approach seeks to justify the reasons for and those against the implementation of this policy both at the local and the national level. Minimum wage is defined by the Government of Canada as the lowest wage that employers can pay employees. The wage is stipulated by the constitution and no employer has a legal right to pay workers any amount less than the set standard. Different countries and agencies across the globe have been championing for an increased minimum wage because it is considered ethically correct. The primary assertion has been that increased minimum wage could be the effective intervention in reducing poverty and inequalities across societies. Proponents of increased minimum wage have been arguing that the increase will have positive effect on the economy as well as uplifting the living standards of people from poverty. While this argument seems to be theoretically viable, opponents of increased minimum wage have taken a practical consideration and established that an increase in minimum wage hurts economy and its people. It is in the consideration of these two viewpoints that this paper argues against the increased minimum wage. The paper provides evidence on the relationship between the minimum and the employment, impact on investors, and the overall effect that arises when employers realize that increased minimum wage has increased the cost of production. It is from this evidence that the paper concludes that all arguments for increased minimum wage are flawed and unrealizable from the practical point of view.
Introduction
The core principle behind minimum wage is to protect vulnerable employees who are exploited by employers in the market. The primary argument for increased minimum wage is to curb exploitation of workers while at the same time seeking to reduce wage inequalities. Proponents of increased minimum wage have compelling reasons to believe that higher minimum wages stimulate productivity because it is used as a motivating factor for employees to work extra. According to CarMichael, this motivation stimulates economic growth because of increased productivity from industries and companies. There is also a direct belief that an increase in minimum wage attracts leads to economic growth because employees have more money to spend as discussed by Edwards (22). Some employees may eventually venture into business because they have enough money to sustain their livelihood while at the same time working extra to meet the production requirements in their respective employment sectors. It is important to stress that these arguments have a theoretical foundation and do not have a practical application from the economic point of view. As a result, the next section of this paper will seek to disapprove the flawed arguments linked to increased minimum wage by drawing on statistical evidence and data from countries and states that have already enforced the $15 minimum wage policy.
Discussion
How the Increased Minimum Wage Harms the Economy
The modern economic theory provides a clear justification as to why an increased minimum wage is harmful to the economy. According to Broilette et al., the direct implication of the minimum wage policy is that it reduces the demand for labor as the employers adjust to higher wages (12). The minimum wage policy makes it illegal for employers to pay their employees salaries less than $15 per hour. This policy does not take into consideration the cost of production that employers incur in the manufacturing process. Since employers are profit-oriented, they will respond to this policy in a manner that ends up hurting employees and the economy at large, hence hurting the very people that were meant to be protected. This can happen in a number of ways as discussed below.
Increased minimum wage increases unemployment among the unemployed and semiskilled workers
Employers are profit-oriented and will not waste their time and resources on recruitments that end up wasting the available resources. According to the research study conducted by Sokal, many employers end up opting for quality skills with the goal of reducing the costs of retraining employees. When this happens, semi-skilled employees are rendered jobless because the employer is focused on reducing the cost of training the newly recruited workers. This is contrary to the theoretical assumption that an increase in minimum wage creates employment opportunities or reduces inequalities in income. The employer is the primary determinant in the hiring and recruitment process. The employer may also be forced to lay down some workers with the goal of reducing operational costs as discussed in Godoy and Reich. This translates to an increase in the number of unemployed people and has an adverse effect on the economy. Instead of increasing employment opportunity and raising the standard of living, it creates a gap between the employed and the unemployed. This is harmful to the economy because the unemployed do not have money to spend in boosting the economy.
Increased costs of production can cause some businesses to close down or merge in order to cope with the competition in the market. According to Edwards, there is sufficient evidence that companies that cannot cope with high costs of production have ended up merging or closing down their doors. Merging leads to unemployment because companies will reduce the number of workers in different departments with the goal of increasing efficiency and maximizing productivity. This is practically possible and it has happened in a number of states such as the New York and California where legislators voted to increase the minimum wage to $15 as discussed by Berik (22). Sometimes the employer will decide to stay with the current employees and avoid new recruitments because hiring and recruitment processes are often expensive. When the employer sticks with employees for a long time, it becomes difficult to new graduates to enter the job market. Employers will take advantage of the minimum wage and focus on maintaining loyalty with their current workforce. This has a direct impact on economic growth as well as the living standards of people that are left unemployed because they cannot enter the job market.
The overall outcome from the employer’s point of view is to reduce the operational costs by strategizing to operate within the legal standards of the minimum wage policy. Since the policymakers do not take into consideration the thoughts and approaches that could be applied by the employer when the policy hurts the business operations, it becomes easy for many employers to come up with strategies that will safeguard the business while at the same time meeting the legal standards of business operations. The overall impact of these strategies is that the very employee that was to be protected and safeguarded ends up becoming a victim of the very policy that was passed to protect him as explained in Fortin and Lemieux (para. 4). At times, the manufacturer may decide to increase the cost of products because of an increase in the production cost. Employed families may be advantaged because they have enough money to spend, but the unemployed and poor families that were meant to be protected end up hurting because they cannot afford quality products. This in turn translates to a higher level of inequality at the expense of the poor, which is contrary to the purpose of the minimum wage policy.
The employer may also decide to strategize by eliminating or reducing compensations because of the increased costs of running the business. According to Sokal (Para. 8), many employers could consider lifting additional costs associated with business operations such as overtime compensations and training programs. Instead of focusing on compensations to motivate workers, the employer may decide to shun such monetary activities with the goal of reducing the costs associated with labor. In the end, the employee will still earn the very salary that was earned before the minimum wage policy was implemented. The other concern with the minimum wage policy is that it does not alleviate poverty, even though this is the point that its advocates tend to sell to the public. In a research study conducted by
Increased Minimum wage Discourages Investment Opportunities
Foreign investors are interested in investing in environments that will earn them profit while at the same time stimulating economic growth. In a survey study carried out by Green, the researcher found out that an increase in minimum wage repels investors and makes them to opt to venture in other countries with standard or affordable costs of production. This translates to adverse effects on economic growth and production. Instead of creating employment opportunities and increasing the standards of living by reducing monopolization, this policy creates monopolization because a few remaining companies may decide to take advantage of the market and sell goods and services at exorbitant prices. Johal explains that instead of using the minimum policy to address the upstream issue of poverty and unemployment, the government should instead use other avenues and opportunities available to channel resources towards the empowerment of people with the goal of uplifting their living standards through productivity.
Corporations and other employers in the market may also decide to reduce the number of working hours with the goal of reducing the costs of labor. The employer will also ask supervisors to make sure that the production and sales have increased within the short time available. This is an attempt to compensate for the extra amount of money used to incur in the additional wages. For instance, some companies in Seattle decided to opt for part-time employees and avoided full-time employees with the goal of avoiding the increased costs of production (Leigh, para. 4). Proponents of an increase in minimum wage may argue that it increases employment, but what indeed happens is that the experienced and skills workers are left with a few hours to work.
Raising the Minimum Wage does not have Positive Impact on the Poor
One of the compelling reasons for increase in minimum wage policy is that it seeks to address inequality while at the same time focusing to help semi-skilled workers and unskilled employees. In a study conducted by Jardim et al, it was established that instead of helping the disadvantaged and minority groups, minimum wage policies end up hurting women and less skilled workers. An example is illustrated in a study observation carried out by researchers in Seattle where the region state lawmakers revised the initial minimum wage from $9 to $13 and eventually $15. What happened was shocking because there was a ripple effect of adverse consequences that had not been imagined. Instead of addressing inequalities and the problems that were affecting minorities, large corporations weighed the costs of implementing the policy and decided to invest in technologies that reduce the costs of production. Intelligent machines have been proved to be efficient in job performance as well as quality standards in the production process. Leigh and Wesley elaborate that automation reduces the number of workers due to its advantages in the reduction of time as well as improvement in quality outcomes. This is because machines do not require motivation or retraining them to improve their quality standards. This is yet another justification that proves that the minimum wage policy does not address the problem it is intended to solve, but it instead magnifies the problem through unintended consequences. Thus, the minimum wage law indirectly champions for unemployment of low-skilled workers instead of creating employment opportunities for them.
The Minimum Wage cannot be used as a predictor of economic growth and productivity
One of the flawed assertions and arguments for an increase in minimum wage is that it increases the productivity of workers because they are motivated to work more, leading to a boom in the country’s economy. This is a theoretical understanding and does not bear any direct implication on what happens on the ground. According to Krisberg, increased minimum wage policy is only good for politicians and a few individuals, especially the majority of employed people who are convinced that an increase in minimum wage will uplift their living standards. They fail to understand that productivity varies across different sectors. Productivity is also affected by the cost of raw materials as well as the demand for goods from the manufacturing company. If there is a lot of production and it ends up threatening the price of goods in the market, the employer may decide to freeze production activities with the goal of increasing the demand for goods as well as attracting the profits. One way of doing this is to freeze production by reducing the number of workers or reducing the working hours to reduce the costs of production. As a result, instead of minimum wages propelling an increase in productivity, it ends up having an adverse effect on workers and productivity as well.
Increased Minimum Wage will increase the cost of living
Even though an increase in minimum wage is postulated to increase the consumer spending and attract economic growth, studies have established that manufacturers and employers will increase the prices of commodities with the goal of compensating the money used to pay workers (Berik para. 5). This is especially true because employers do not have any other source of funds to use for paying workers. They only use the proceeds from the business to grow it while at the same time using the funds to pay their workers. Any attempt to disrupt the business operation makes the employer or the manufacturer to respond by transferring the cost of production to the consumer. The overall impact of this transfer is that the consumer is forced to pay more for goods that were initially cheaper. Thus, as a result, instead of alleviating suffering and poverty, the minimum wage policy ends up hurting the very people that it was meant to safeguard. Employed and wealthy individual will have enough money to spend, while the poor and unemployed populations will languish in poverty because they do not have enough money to afford basic commodities as shown in figure 1 in the appendix section.
Conclusion
The minimum wage debate draws the attention of economists and politicians. The minimum wage debate draws the attention of politicians because they assume that an increase in the minimum wage will trigger economic growth. This is contrary to the position held by economists who study the impact of increase of minimum wage on the employment and eventual economic growth. Minimum wage policies are like a direct taxation on the employer. The policy tends to increase the cost of production, which is unfavorable for business operations. They ignore the plight of employers who may be forced to incur additional costs in salaries as they attempt to reduce the costs of labor. When the plight of employers is not taken into consideration, they may decide to react in a number of ways and end up having an adverse impact on to the projected economic growth. This can happen through reduction of new employments, reduction of working hours for employees, and the transfer of the costs to the consumer with the goal of maintaining marginal profits and operating within the legal standards of doing the business.
Works Cited
Broilette, Danny et al. “The Impacts of Minimum Wage Increases on the Canadian Economy.” The Bank of Canada, 2017, https://www.bankofcanada.ca/wp-content/uploads/2017/12/san2017-26.pdf, Accessed 4 Nov. 2019
Berik, Gunseli. “Measuring what Matters and Guiding Policy: An Evaluation of the Genuine Progress Indicator.” International Labor Review. https://onlinelibrary.wiley.com/doi/abs/10.1111/ilr.12153, Accessed 4 Nov. 2019
CarMichael, Kelvin. “Canada Must Get Serious About Income Inequality, but How?” MacLeans, n.d. https://www.macleans.ca/economy/canada-must-get-serious-about-income-inequality-but-how/, Accessed 4 Nov. 2019
Edwards, Chris. “Negative Effects of Minimum Wages.” Cato at Liberty. https://www.cato.org/blog/negative-effects-minimum-wage, Accessed 4 Nov. 2019
Fortin, M., Nicole and Thomas Lemieux. “Changes in Wage Inequality in Canada: An Interprovincial Perspective.” http://irpp.org/wp-content/uploads/2016/01/aots5-fortin-lemieux.pdf, Accessed 4 Nov. 2019
Godoy, Anna, and Reich, Michael. “Minimum Wage Effects in Low-Wage Areas.” Institute for Research on Labor and Employment, https://irle.berkeley.edu/files/2019/07/Minimum-Wage-Effects-in-Low-Wage-Areas.pdf
Green, John. “Income Inequality.” The Conference Board of Canada, https://www.conferenceboard.ca/hcp/Details/society/income-inequality.aspx?AspxAutoDetectCookieSupport=1, Accessed 4 Nov. 2019
Jardim, Ekaterina et al., “Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle.” The National Bureau of Economic Research. https://www.nber.org/papers/w23532, Accessed 4 Nov. 2019
Johal, Mary. “Raising the Minimum Wage: An Upstream Policy to Help Promote Health And Wellbeing.” Alliance for Healthier Communities, https://www.allianceon.org/news/Raising-Minimum-Wage-upstream-policy-help-promote-health-and-wellbeing, Accessed 4 Nov. 2019.
Leigh, J Paul. “Arguments for and Against the $15 Minimum Wage for Health Care Workers.” American Journal of Public Health vol. 109, no. 2, 2019, pp. 206-207. doi:10.2105/AJPH.2018.304880, https://www.ncbi.nlm.nih.gov/pmc/articles/PMC6336047/, Accessed 4 Nov. 2019
Kim, Brisberg. “Income inequality: When Wealth Determines Health: Earnings Influential as Lifelong Social Determinant of Health.” The Nation’s Health, http://thenationshealth.aphapublications.org/content/46/8/1.1
Millsap, Adam. “How Higher Minimum Wages Impact Employment.” The New York Times, 28 Sept. 2018, https://www.forbes.com/sites/adammillsap/2018/09/28/how-higher-minimum-wages-impact-employment/#22c1d0771e7d, Accessed 4 Nov. 2019
Sorkin, Isaac. “Are There Long-Run Effects of the Minimum Wage?.” Review of economic dynamics vol. 18, no. 2, 2015, pp.306-333. doi:10.1016/j.red.2014.05.003
