Introduction
The minimum acceptable amount that an employer is legally required to pay their employee per hour or month has been a source of argument among various parties. These arguments have elicited contradictory opinions about the importance and drawbacks of laws on minimum wages. Significant factors associated with minimum wage are business effectiveness improvement, individuals’ living standards, equity and equality, socioeconomic status, and different opportunities (Manning, 2021).
While increasing the minimum wage may reduce employment opportunities and hinder proper business development, it can also help redress economic imbalances and improve living standards. This research evaluates the concept of minimum wage in the context of economic models and illustrates its positive and negative effects on economic growth. The paper also highlights the international importance of appropriate and deliberate management of the minimum wage, which is critical for achieving economic growth and stability, as evidenced by the global impact of minimum wage policies.
Effects of Minimum Wage Policies
Studies have attempted to analyze the impact of minimum wage policies on economic growth. Some studies, such as Cengiz et al. (2019) and Manning (2021), discuss the potential effects of minimum wage increases on job losses, stating that such impacts might be inconsistent or hardly detectable. To be more precise, the article by Cengiz et al. (2019) highlights quite engaging and complex effects of minimum wages. They compare demographic data to determine that, over the five years after the growth of minimum wages, no specific changes in the number of low-wage jobs were noticed. However, the authors “find some evidence of reduced employment in tradeable sectors,” meaning that some sectors still experience the adverse effects of minimum wage growth (Cengiz et al., 2019, p. 1405).
Further, according to Manning (2021), an elusive employment effect plays a significant role and must be considered. This phenomenon prevents researchers from identifying proper relations between low minimum wages and labor market conditions. On the other hand, some other relationships between minimum wages and labor are detected, and their impact on low-wage jobs is an essential factor to consider. The potential job losses from minimum wage increases may concern policymakers, particularly in industries with high labor costs.
According to Cengiz et al. (2019), minimum wage increases can lead to job losses, especially among young and less-skilled workers. Cengiz et al. (2019) also point out that employers responded to minimum wage increases by cutting hours, although the magnitude of these effects was relatively small. The authors note that their findings are consistent with previous research on the impacts of minimum wage increases, which generally found minor employment effects and positive wage effects.
Further, Dustmann et al. (2022), who draw their conclusions based on evidence from different industry sectors in Germany, find that minimum wage increases can lead to the reallocation of labor within firms, with workers in low-wage jobs benefiting from higher wages. This proposes that the effect of minimum wage policies on employment markets and the economy is complex and influenced by multiple factors, including workers’ wage level, productivity, and skill level.
Supply of and Demand for Low- and High-Skilled Workers
According to the laws of supply and demand, all economic factors are incorporated in employment, which depends on the equilibrium between labor supply and labor demand. These concepts, as noticed by Manning (2021), can establish the level of wages naturally and without human interference. Since there is a low supply of low-skilled labor in contrast to high-skilled labor, having a minimum wage will force employers to minimize their recruitment within the low-skilled market.
Thus, this will automatically affect a large population. Likewise, the high-skill labor market will not be affected since it is vital to employers, and the segment usually contains a limited number of individuals (Manning, 2021). As a result, to allow for the low-skilled labor market to continue its development and prevent its unemployment growth, the focus of such policies should be on reducing the minimum wage.
One potential solution to this problem is implementing a tiered minimum wage system, which would provide different minimum wages based on a worker’s skill level or experience. This would allow firms to pay lower wages to workers with less knowledge or fewer skills while still providing a higher minimum wage to more experienced or skilled workers. Such a system could reduce the adverse employment effects of minimum wage policies while still helping to reduce poverty rates and increase living standards for low-wage workers.
Reallocation of Finances and Consumer Purchasing Power
Another beneficial effect of minimum wages is that they make income distribution more appropriate, which eventually stimulates national consumption. If low-skilled employees receive reasonable payment, their purchasing power grows, allowing the authorities to reduce the expenditure on social welfare programs and distribute the funds to other vital projects (Dube, 2019). Setting minimum wages also gives people a sense of encouragement, allowing them to enroll in education and training programs (Harasztosi & Lindner, 2019). They have contributed to increased productivity and reduced turnover, which can benefit employers. Therefore, these factors will enable workers to pursue jobs with higher pay and increase productivity as employers can implement technologies to enhance efficiency.
However, the reallocation effect is not always straightforward, and the benefits may not be distributed evenly across all workers. Workers who are not highly skilled or have limited work experience may need some help finding employment, even if higher-wage jobs become available (Dube, 2019). Additionally, firms may automate or outsource jobs rather than pay higher wages, which could ultimately lead to job losses in specific industries.
The effects of minimum wages are inconsistent within different sectors, and Dube (2019) notices that “the highest coverage rates are found in the accommodation and food service and administrative and support service sectors” (p. 15). Dube (2019) retrieves data from different credible sources to draw conclusions and provide recommendations for international minimum wage factors. Therefore, policymakers must consider the potential reallocation effects of minimum wage policies when designing them and focus on the differences between industries.
Consumer Spending and Economic Growth
The various research conducted has produced mixed reactions concerning the impact of minimum wage on economic growth. Some studies acknowledge that minimum wage laws positively impact consumer spending and economic development, while others have found no substantial influence on economic growth and employment. For instance, a study by Cengiz et al. (2019) found that increasing the minimum wage does not impact employment levels in the long run.
On the contrary, Dustmann et al. (2022) agreed that an increase in the minimum wage boosts consumer spending, resulting in increased economic growth. While this argument on the laws of minimum wages is not about to end, a consensus on the matter is critical. It will allow the formulation of policies enabling any country to attain optimum productivity and reduce unemployment.
Additionally, the impact of minimum wage policies on the economy is not without negative consequences. Harasztosi and Lindner (2019) found that firms and consumers bear the cost of minimum wage increases, leading to increased prices and reduced profits. The impact of minimum wage policies on economic growth cannot be analyzed in isolation but requires consideration of the broader economic context. To achieve economic growth through minimum wage policies, policymakers should focus on comprehensive policies that address economic insecurity and inequality.
Living Wages
Recently, much debate has surrounded the concept of a living wage. It is a wage that provides workers with a decent living standard. Its supporters argue that facing the poverty and income inequality challenge is quite essential. On the other hand, its opponents say this can negatively affect economic growth. Employers have implemented living wages in some cities and states to pay workers higher than the minimum wage.
For instance, in 2014, Seattle City implemented a $15 minimum wage, gradually phased over several years (Cengiz et al., 2019). Those who support the law testify that it has alleviated poverty and reduced income inequality (Cengiz et al., 2019). On the contrary, opponents argue that the law has led to joblessness and decreased economic growth.
Prosperity of the Middle Class and Poverty Rates
A growing concern has been experienced in the declining prosperity of the middle class in many developed countries, including the United States. Some economists believe that this decline results from stagnant wages and income inequality. However, Dustmann et al. (2022) agree that income inequality in these countries has risen.
Further, Gindling (2018) bases their recommendations and conclusions based on available statistics, information received at “the IZA World of Labor Minimum Wage Workshop, 2013,” and previous research (Gindling, 2018, para. 8). Gindling (2018) indicates that, in 2015, the top 1% of the United States earners received 26.3% of the country’s revenue, while the bottom 50% earned just 12.5%. Such a gap makes it difficult for middle-class families to gain financial stability, harming economic growth.
Moreover, the impact of minimum wage policies on poverty rates and living standards is a crucial consideration. Poverty rates and living standards are essential indicators of economic growth, and policymakers should strive to improve these indicators through policies such as minimum wage increases. Gindling (2018) found that minimum wage increases can reduce poverty rates in developing countries, suggesting that minimum wage policies can benefit economic growth when designed appropriately. However, opponents argue that minimum wage policies could hurt low-wage workers by reducing employment opportunities and increasing prices.
Pros and Cons of the Minimum Wage Increase
One primary benefit of minimum wage laws is that they ensure that employees do not receive less than the recommended value for their monthly, weekly, or daily services, which in turn promotes economic growth and stimulates consumer spending. Therefore, an environment for mutually beneficial relationships between employers and workers is created, and employees can be more motivated and committed to achieving organizational goals (Manning, 2021).
Conversely, opponents of minimum wage laws argue that creating policies that pressure employers affects the employer-worker relationship in negative rather than positive ways. They can harm businesses, resulting in unemployment and decreased economic growth. These factors indicate that minimum wage laws reduce employment chances more, especially among low-skilled workers. This affects the employer-worker relationship as many employees seek to get the maximum value for their money. Apart from the effects of employment, minimum wages also increase inflation chances as restrictions on businesses force many companies to transfer costs to their consumers (Harasztosi & Lindner, 2019). It also encourages job movement as many people search for appropriate occupations. Hence, this may interfere with development agendas in many regions.
Examples from Other States and Countries
In order to solve the mentioned issues associated with minimum wages, it is recommended that policies should be implemented to raise the wages of low- and middle-class workers. Since there cannot be ideal monopsony and neoclassical consequences in labor markets, there is not always a connection between a loss of employment and increased minimum wages (Dustmann et al., 2022). For example, Pennsylvania, New Jersey, and some other U.S. states increased their minimum wages but did not observe a reduction in the number of employed individuals. Instead, raising the minimum salary for these states led to increased employment.
Some countries experience substantial differences in minimum wage laws and economic growth. For instance, Denmark and Switzerland have high minimum wages and strong economic growth, while Greece and Spain experience low minimum wages and weak economic growth (Manning, 2021). However, it is essential to note that minimum wages do not necessarily lead to an increase in prices since the labor costs in many companies do not usually count for their overall expenses (Manning, 2021). Hence, an increase in the minimum wage is not directly linked to the loss of employment as other factors, such as trade and tax policies and labor market regulations, usually affect work. Drawing direct relationships between minimum wage laws and economic growth can be difficult.
Conclusion
The effects of minimum wage laws on economic growth are usually complex issues with mixed reactions. Some studies agree that the laws stimulate consumer spending and enhance economic growth. In contrast, others have disagreed because they believe they can result in job losses and decrease economic growth.
Similarly, while living wage laws can ease poverty and reduce income inequality, they can also negatively impact businesses and economic development. The effect of minimum wage laws on the economy’s growth also depends on various factors. However, addressing these issues is vital as it promotes sustainable economic growth and policies that play a role in achieving this goal.
References
Cengiz, D., Dube, A., Lindner, A., & Zipperer, B. (2019). The effect of minimum wages on low-wage jobs. The Quarterly Journal of Economics, 134(3), 1405-1454. Web.
Dube, A. (2019). Impacts of minimum wages: Review of the international evidence [PDF document]. Web.
Dustmann, C., Lindner, A., Schönberg, U., Umkehrer, M., & Vom Berge, P. (2022). Reallocation effects of the minimum wage. The Quarterly Journal of Economics, 137(1), 267-328. Web.
Gindling, T. H. (2018). Does increasing the minimum wage reduce poverty in developing countries?IZA World of Labor. Web.
Harasztosi, P., & Lindner, A. (2019). Who pays for the minimum wage?American Economic Review, 109(8), 2693-2727. Web.
Manning, A. (2021). The elusive employment effect of the minimum wage. Journal of Economic Perspectives, 35(1), 3–26. Web.