Why minimum wage isn’t enough to compensate for the standard of living in many places.
The minimum wage debate has been an ongoing economic discussion over the last 100 years and while it was relevant as the global economy integrated, it is extremely important right now as jobs, industry and finances become international and borderless. Fiscal experts have regularly pointed out that a full time living wage job is insufficient to support basic needs in many places. In the US the situation is extremely perilous with most counties unable to support a minimum wage lifestyle.
This discussion highlights the economic challenges that countries like the US that practice pure capitalism face. On the one hand, low minimum wages make life extremely difficult for low income earners who literally slave everyday just to put feed themselves; while on the other hand low wages are unattractive to too many able-bodied citizens who stay out of key jobs and become dependent on welfare, becoming a burden on the state.
This paper will delve into the intricacies that inform the conviction that a minimum wage is increasingly falling below the subsistence wages that menial jobs offer. Don't use plagiarised sources.Get your custom essay just from $11/page
According to the National Low Income Housing Coalition, a US resident working full time on a living wage job can’t afford a rented home nearly everywhere in the US. If that resident is looking for a decent one-bedroom house to rent, there are only 12 counties across the entire country, mostly in the rural Midwest, that he or she can take up. Worse, there is nowhere in the entire country that such residents can rent two bedroom apartments, not the metropolises, cities or even rural zones (NLIHC, 1-5). This classification is based on the 30 per cent federal-defined threshold that an income earner should spend on shelter. Further, this is still the case even in states where authorities have raised the minimum wage above the federal levels at $7.25, such as New York and Los Angeles ($15). The minimum wage that would be sufficient for shelter in such states is above $22.
This means low income earners in the US must sleep in homeless shelters, cluster together with other low income earners in crowded houses or rely on richer friends and/or relatives to provide them with decent housing.
Conventional employer wisdom has it that an increase in the minimum wage as periodically happens nationally and at the state level is bound to eat into the earnings of businesses and lead to job losses through lay-offs. However, in their influential study on minimum wages Card and Krueger (7) show that the living wage increase of 1992 from $4.25 to $5.05 in New Jersey had the opposite effect in restaurants across the state as employment actually increased by almost 10 per cent over the next year. This means full-time equivalent job engagement rose in the state as restaurants implemented the new law. However, food prices in the 473 surveyed restaurants increased by about 3 per cent in the aftermath of the new hiring.
The obvious conclusion here is that employment and minimum wages aren’t a function of employer bottom-lines but rely mostly on prices companies charge clients. Conversely, advocates of lower minimum wages depress the economy by keeping potential employees away, people who prefer to rely on welfare rather than slave labor wages. This illustrates how little the living wage has become in the US.
Analysts and stakeholders have advanced various arguments against raising the minimum wages, the most powerful of these being the adverse effect that wage increases would have on the bottom-line.
However, other nuanced and equally compelling arguments exist. Dolton and Bondibene (99) argued in their study of wages in 33 countries across 1971 to 2008 and found increasing the living wage cut unemployment among the youth and auxiliary staff. This, they said is due to the subsequent layoffs that usually target the least experienced or engaged employees. Meer and West (2015) found that minimum wages force employers to seek younger employees from financially stable families compared to the poorer ones while Ahn et al (12) found that the real losers of enforced minimum wages are the younger workers and low wage sectors of the economy.
Various economic factors have created the necessity of authorities setting wage benchmarks that employers must adhere to. The first is the adverse effect that wage stagnation has on the economy against inflation. The rampant inflation in most economies across the world means that what is affordable under today’s wages will not be within reach for most workers in the next five years or less. Thus setting incremental changes to earnings ensures the poverty base isn’t growing due to reduced earnings (Eyraud et al, 62).
Raising the minimum wage thus enables workers to continue earning a living while preventing them from falling into the welfare basket. The cost of this rise in wages goes to the employers who can rationalize their business models to accommodate it or pass the extra costs to customers. In many instances these customers are the same workers who with better wages can now pay for goods and services. Quigley (2015) shows that minimum wage increases have negligible effects on job los numbers. Ultimately, the minimum wage has risen 23 times since the law allowing it came into force in 1938 but drastic or noticeable job losses have never occurred. It is a benign solution to a vexing economic question: how the state can cooperate with the private sector to improve living standards without attracting a backlash. Considering the consistent rise in prices of basic items such as food, clothing and shelter, it is essential that authorities take these measures to improve livelihoods.
Among the unanswered questions lingering over the issue of minimum wages in the studies quoted are two major sticking points. First, in the influential Card and Krueger (1992) study on the effect of minimum wage rises on job losses, we have a very specific and narrow sector as the data source. The study only focuses on restaurants in New, leaving out other cities and sectors of the economy where more interesting findings undoubtedly exist. Dolton and Bondibene (2012) also make the mistake of looking at a limited data set of 33 countries without interrogating enforcement. Several middle and income countries maintain minimum wage laws and even engage in annual Labor Day minimum wage increases for purely cosmetic purposes without actually enforcing the rules.
Secondly, proponents of raising the minimum wage don’t answer the question of how to dissuade employers from seeking cheap immigrant labor such as the case of the US and its sizable Mexican workforce. The number of Mexican workers in the US continues to rise despite the regular increase of the minimum wage, pointing to two possibilities; either employers are seeking cheap immigrant labor that is ready to accept below minimum salary payments or the native labor force is just not willing to work for whatever living wage the authorities set. This indicates a social problem that is deeper than any economist can confront armed with wage policies alone.
However, the past research also illuminates the subject in new ways within the modern context of a global economy, immigration and the inflation phenomenon.
When examined from the context of global economy, the minimum wage question creates a massive area of study that will consume interest for decades to come. Some of the key questions would be the effect of rising minimum wages in one country and stagnant wages in competitor countries that produce similar products. Would that make the first country competitive in the global economy?
When examined from the context of immigration, some of the key questions would be the effect of a sizable immigrant labor source in neighboring territory. What would employers do if they found minimum wage law enforcement weak and wage costs too high in such a scenario? What social forces would such economic choices unleash?
Finally, inflation in the United States almost certainly unleashes a domino effect across the global economy, in smaller economies and corporations. Does the solution to inflation lie in increasing the minimum wage or in fashioning better economic measures and policies that would protect workers locally and globally? Would this secure employer profits?
With the setting of the minimum salary at $7.25 in 2009, we find an interesting scenario where both proponents and opponents of regular living wage increases are in the spotlight. On one hand, proponents of the rise point to the 9 year stagnation as the reason many qualified American workers aren’t actively seeking jobs due to their low pay. They also point to the increased reliance on state welfare over that period as a sign of the economic impact of neglecting this law (Abott, 4).
On the other hand, opponents of periodic increases in the minimum wage point to the comparatively high US levels as immigration a magnet pulling in legal and illegal foreigners into the workforce. They also say that high minimum wages have made American products uncompetitive abroad and created a conducive environment for countries like China to supplant the US politically and economically.
In conclusion, a study of the literature finds that the minimum wage today isn’t enough to compensate for the standard of living in many places.
Firstly, we find that the nine year rate is unable to sustain Americans who need shelter. Second, the real value of the minimum wage isn’t keeping up with the cost of food and other necessities. Third, we find that the authorities have slackened their enforcement of minimum wage policies, enabling the employment of millions of migrant labor that is paid below minimum wages. Fourth, we also discover that minimum wage standards of the 1960s compared to the average wage then were at 50 per cent. If the authorities maintained that standard the minimum wage today would be $12.50, not $7.25 (Quigley, 2015).
Bibliography
Abbott, Lewis (2013), Statutory Minimum Wage Controls: A Critical Review of Their Effects on Labour Markets, Employment and Incomes. Industrial Systems Research.
Card, David & Krueger, Alan. Minimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania. pp7. http://www.uh.edu/~adkugler/Card%26Krueger.pdf
Dolton, Peter and Bondibene, Chiara Rosazza, The International Experience of Minimum Wages in an Economic Downturn (January 2012). Economic Policy, Vol. 27, Issue 69, pp. 99-142, 2012. Available at SSRN: https://ssrn.com/abstract=1987317 or http://dx.doi.org/10.1111/j.1468-0327.2011.00278.x
Eyraud, François, Saget, Catherine, (2005) The Fundamentals of Minimum Wage Fixing. Pp 62, International Labour Office, International Labour Organization, 2005
Meer, Jonathan, West, Jeremy. (2015) Effects of the Minimum Wage on Employment Dynamics. Texas A&M University and NBER
NLIHC. (2017), OUT OF REACH 2017: The High Cost of Housing, National Low Income Housing Coalition. pp 1 – 5. http://nlihc.org/sites/default/files/oor/OOR_2017.pdf
Tom Ahn, Peter Arcidiacono & Walter Wessels. The Distributional Impacts of Minimum Wage Increases When Both Labor Supply and Labor Demand Are Endogenous. Pages 12-23 | Received 01 Apr 2007, Published online: 01 Jan 2012
Quigley, Bill. Top Ten Arguments for Raising the Minimum Wage, The Huffington Post, published, May 16, 2015. Accessed Marc 8, 2018. https://www.huffingtonpost.com/bill-quigley/top-ten-arguments-for-rai_b_6879220.html