In both U.K and U.S, politicians are proposing plans to raise the minimum wage. The United States is planning a significant increase from $7.50 to $15 by 2024.
The supporting arguments for raising minimum wage include reduced work, poverty, reduction in inequality, and incentive to increase the productivity of labour and higher wages leading to an increase in economic growth.
Drawbacks of the Minimum Wage:
While on the negative side, raising the minimum wage too fast could cause a rise in costs related to business, rise in unemployment rates, and higher risks for consumers –basically problems faced in depressed, low wage sectors and regions.
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For some time now, the debate has shifted around controversy, whether not to or raise the minimum wage. The current minimum wage is approximately about $7.25.
In this article, we are going to discuss the pros and cons of raising the minimum wage.
Pros of Raising the Minimum Wage:
Reasons for raising minimum wage include:
- The stimulus to economic conditions
- Open more opportunity for jobs
- The reduced expense for problems related to social issues
- Increase inflation
- Decreased turnover rate
- Productivity level increases
- Reduces poverty
- Deals with the power of monopsony related to firms
The Stimulus to Economic Conditions:
Raising the minimum wage means minimum wage workers have more money now to expend. It means money ripples throughout the economy as minimum wage workers got the capacity to spend more.
Open More Opportunity for Jobs:
If minimum wage employers are spending more, which means businesses are earning more now. It also needs to increase sales from minimum wage employees who are buying more.
The Reduced Expense for Problems Related to Social Issues:
Employers surviving at minimum wage are the same people who must rely on the additional support of the government to run social programs. It will help to support themselves and their families on a small amount of income.
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Moreover, raising the minimum wage means these people will be better able to support themselves without leaning much on social programs. This will ultimately lower taxes or reallocation for those funds to support other needs.
Federal minimum wage needs to be raised to account for inflation which almost rises each year. The minimum wage has been raised nearly three times in the last three decades.
Decreased Turnover Rate:
Employees who are making minimum wage higher feel more comfortable. It also satisfies them in their minimum wage jobs that are less likely to quit. This would decrease the turnover rate, which results in fewer expenses to train and hire new employees.
Productivity Level Increases:
A rise in minimum wage creates an incentive for firms to invest in automation and increase the productivity of labour. This overall investment in productivity will help in the economy and enable the firms to be able to afford the increase in the minimum wage of employers.
Moreover, it shifts the economy to be less labour-intensive. This leads to fewer hours of work as firms shift to a greater return from labour. Productivity level is the main factor in determining the long-run rate of economic growth.
In the last few decades, it is confirmed that rent has been rising above inflation. This has squeezed the living standards for those having a lower income spectrum.
Many western economies have also seen a growth in inequality with the gap between high-income earners and low-income earners.
Deals with the Power of Monopsony Related to Firms:
In the real world, labour markets are not competitive. Employers have significant power of monopsony related to firms. This means that they can pay wages below equilibrium and take a higher share of profit. That is why raising the minimum wage brings about a little fall in employment.
Cons of Raising the Minimum Wage:
Reasons against raising minimum wage include:
- Budget layoffs
- Prices relatively increase
- Only a few hiring’s
- Competition intensifies
- Applied minimum wage inconsistently
- Lack of flexibility
- More costs in poor areas
If the employer has a tight budget compensation budget and the minimum wage is increased, it means they longer have the ability to compensate for the same number of employees at higher rates.
Moreover, they must make layoffs to remain within the budget. In this way, more employees will be making significantly more money, and less will be left unemployed.
Prices Relatively Increase:
Employers must increase the prices of their products by generating enough income to support their highly paid minimum wage employees. This could ultimately create a rippling effect for other shops and industries.
It results in slightly higher costs of living which in turn serve as another push to raise the minimum wage.
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Only a Few Hirings:
If businesses start paying their minimum wage employers more, they are less likely to hire more. However, instead of hiring more employees, they start outsourcing their projects or jobs to employees that are willing to work for less than $10.10 for just an hour. This creates fewer job opportunities for Americans.
If we increase the minimum wage, the overly qualified individuals will start envying for minimum wage positions pushing younger and inexperienced workers out in the market to work.
This pushes them of their opportunity to gain experience and knowledge to build a resume for them and enter the work field.
Applied Minimum Wage Inconsistently:
Many states in the United States have to set their minimum wage, which is currently above $7.5 hour already. So the amount of minimum age varies significantly from state to state.
Lack of Flexibility:
In a recession, demand for labour decreases, and the curb is developed on wages. It is in these moments when the negative effects of a minimum wage on employment become the greatest, and the cost of the minimum wage is highest.
More Costs in Poor Areas:
A nationwide minimum wage will have a greater impact on poor areas where regions have higher unemployment and minimum labour income. It has been observed that poor areas suffer more from poverty and also from unemployment.
So, studying both sides of arguments make it clear that raising the minimum wage does not make a significant influence on the poverty level. Some people suggest that it is better to create jobs for people rather than raising the minimum wage. But it all depends on your choice!
You must consider these pros and cons before you decide to increase the wage of labourers.