Impacts of raising minimum wage

Impacts of raising minimum wage

Introduction

Raising of minimum wage is a strategy taken by government both at state and federal levels to raise the salaries of low income earners. The idea behind this step is to improve standards of living of families whose daily bread earners are real subjects of low wage rate (Hall et al P.341). For instance, raising of minimum wage rate in USA is meant to build a lasting economic security for middle class and add more opportunities through which all employed citizens can use their earnings to sustain and take them ahead. In addition, this deal is validated in order to favor women because they mostly compose the group in low-wage sectors such as personal and health care support occupations. However, raising of minimum wage has many challenges on consumers, unemployment and business in general. Actually, raising minimum wage rate lead to adverse effects such as increased operational costs for business among many others. Governments should avoid the use of raising minimum wage policy to improve standards of living of labor market in their countries (Hall et al P.341). This paper clearly explains challenges of raising minimum wage rate by outlining various negative impacts of steps taken by government to increase low-wage earners salaries.

Minimum wage

The Congress in USA instituted a minimum wage to federal governments as part of the Fair Labor Standards Act (FLSA) in 1938. Despite this, all the states and local government entities have authorities to set their own wage rates above the value set by the federal governments (Hirsch P.223).This has led to differences in minimum wage rates across all the jurisdictions. Over 21 states in USA including Washington at $9.32 per hour have their wage rates set above the federal level. In addition, 20 states have their wages equal to federal wage rate while the rest have wage rates less than the federal wage rate but employers pay wage rates equal to federal wage level. These set rates have adverse employment effects on employers and business in whole. To offset this, employers are forced to make critical decisions in order to curb the induced increase in production costs. This takes the form of reducing working hours and decreasing hiring rates which in turn have negative effects in the exiting tough job market.

However, raising minimum wage rate favors the already employed people at the expense of unemployed. Some of the workers benefit through real wage increase while on the hand, less educated group starve in the market looking for jobs. Despite all this, advocates at federal and state level still emphasize on the increase in minimum wage for all employed people (Neumark et al P.37). The overall result of this idea is that, decision on raising minimum wage to favor workers in USA has posed a great challenge to small businesses and individuals it is meant to help (Neumark et al P.37). All legislative bodies worldwide should with a lot of seriousness reject bills on the raise of minimum wage rate to boost living standards of low class families.

Negative impacts of raising minimum wage

These are some of the negative responses by employers as a result of raising minimum wage rate. Significantly, these are strategies meant for creating a lasting economic security to middle class and availing more opportunities through which low wage employees can use their income for sustainment purposes.

Reducing non-wage benefits

Due to increased costs as result of raising minimum wage, employers are likely to cut off non- wage benefits such as pension insurance and pension contributions (Robert P.133). This is an additional burden to the employees as they will now be forced to pay for the services directly.

Increasing prices

Employers are likely to offset the impacts of increased minimum wage rate to the business by raising the prices of their products in order to cut down the costs. Since it is in a purely competitive economy, all the firm are suffering similarly and therefore the overall impact is passed to consumers through increase in prices of the products.

Reduction in profits

Raising minimum wage rate tend to have an induced negative impact on profitability of firms. Moreover, it tends to increase costs on employees and as obvious lead to reduced profits in the long run.

Reduction in worked hours

Raising minimum wage rate does not always increase the cost of hiring workers. Instead, in the competitive market, it is actually meant to increase the cost of hiring an hour of work of those employees. Employers might be tempted to respond to reduced wage rates by reducing the employees working hours.

Changes in employment compositions

Employers may tend to adjust to raising minimum wage rates by upgrading the skills of the high wage rate employees and probably sacking the low –wage rate employees in order to lower operational costs (Robert P.132). This definitely results to unemployment. The low wage rate employees and the group looking for employment are mostly affected.

Wage compression

Employers may as well respond to raising minimum wage by trying to balance the incomes. This may involve reducing the income of high wage earners in order to add to that of low wage earners. This decision adversely affects the high wage employees because they are forced to adjust their standards of living. These changes have been noted in USA upon the implementation of such policy.

In conclusion, it is clearly evident that formulation of reduced wage policy to serve as a tool for poverty eradication and economic development in general does not meet the expected impacts in the economy of a country. Instead, the policy adds to the existing challenges such as unemployment and increased operational costs for firms. The idea of raising minimum wage rates purposely to build lasting economic security should   be avoided both at state and federal levels.

Works cited

Hall, Doug, and David Cooper. “How raising the federal minimum wage would help working       families and give the economy a boost.” Issue Brief 341 (2012).

Hirsch, Barry T., Bruce E. Kaufman, and Tetyana Zelenska. “Minimum wage channels of adjustment.” Industrial Relations: A Journal of Economy and Society 54.2 (2015): 199-       239.

Neumark, David, and William Wascher. “The effects of minimum wages on employment.” FRBSF           Economic Letter 2015 (2015): 37.

Shimer, Robert. “Reassessing the ins and outs of unemployment.” Review of Economic Dynamics             15.2 (2012): 127-148.