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April 17, 2014



Deep Thoughts: Minimum Wage

I’ve been doing a great deal of thinking lately about the minimum wage.  This might be in part because I’ve been looking into part time, minimum wage level work until I’m able to get something more permanent.  (It’s probably a bad sign when even Wal-Mart is not hiring; I’m not sure if there is a ‘Wal-Mart Hiring’ economic indicator, but it’s not looking too hot at the moment.)

I’ve been trying to think about what would happen to the economy if the minimum wage were to change.  As with any effect on the economy, there will be ripples that stretch out to affect other people and groups besides the minimum wage earners; no man is an island, especially not in the current economic climate.  So, what would be some consequences of doubling the minimum wage?

  • Higher Unemployment: If it costs more to hire people, companies are going to try to trim back employment as much as they can.  Depending on how much the companies react to the change in labor costs (the elasticity of the labor supply),there probably won’t the amount of decreased employment needed to keep labor costs constant (that is, doubling the minimum wage won’t lead to half of minimum wage workers being fired; unless companies are employing a vast excess of workers (not very likely, at least currently), they need to keep the bulk of their workers to keep the business running).
  • Higher Wages: For the workers who maintain their employment, there’s likely to be higher wages.  Not only will those earning minimum wage (or between minimum wage and twice minimum wage) have their income bumped up to twice the previous minimum wage, but it will have a ripple effect through the economy.  If you were earning a premium above the minimum wage due to experience or education, you’d expect to continue earning such a premium, even if the minimum wage increases.  A study of the doubling of the minimum wage in Indonesia shows just that sort of increase.  (Along with the aforementioned decline in employment and decrease in investment.)
  • Higher Prices: At least some of the cost of the higher minimum wage will be passed along to the consumer.  Ultimately, it is the end consumer who will pay for any increase in labor or other production costs; how much of an increase, and how persuasive it ends up being, will depend on any number of factors, including the percentage of the final cost of the product that is attributable labor costs.  (Here’s one perspective on how labor costs affect the final price paid, although you likely find others that will argue such a change will have a much greater effect on the final prices.)
  • Lower Benefits: If the minimum wage rises, there is high likelihood that other benefits will decline as a result.  Companies will endeavor to keep their business costs constant (if not reduce them when possible); if labor costs rise due to higher wages, there will be a backlash to attempt to lower them by eliminating benefits or other non-wage costs of keeping employees.

Seems like something of a push; depending on your perspective, the benefits of raising the minimum wage may outweigh the disadvantages, or they may not.  If you’re unemployed, likely to be unemployed if your company is squeezed, or earning substantially more than minimum wage (and thus, unlikely to see too much of a boost from a higher minimum wage’s lifting effect), a higher minimum wage is likely to hurt you more than help; jobs will be scarcer, and prices will be higher, neither situation helping you much.  If you’re employed at or near minimum wage and you can dodge getting ‘downsized’, increasing minimum wages will put more money in your pocket (and if you aren’t getting any benefits besides a wage, there won’t be anything to lose to offset the higher wage).

Let’s consider a different tactic; what if the minimum wage is abolished?  What if employers could offer any wage they want?  We’d expect to see much of the opposite situation as we did above; unemployment would likely decrease (few companies would say no to more employees if they could get them cheaply enough), wages would likely decline (new workers could be hired for less, and current workers would either accept lower wages or get fired) and prices would decrease with the lower costs of input.  (The benefits are a bit hit or miss; it’s unlikely that companies will suddenly pay for full benefits for minimum wage workers just because the minimum wage drops.)  Several other effects of losing the minimum wage are discussed here, along with a few arguments against dropping the minimum wage.

Conclusions

I don’t claim to know exactly what we should do about the minimum wage; that’s a question a bit above my authority.  Lowered unemployment and prices vs. higher wages and more equitable distribution of corporate income; these are arguments that should be decided in a democracy by the people after debate and due consideration.  My goal is simply to raise the argument (and give myself an excuse to research into some of these issues).

What do you think?  Would the benefits of doubling the minimum wage outweigh the downside?  Should the minimum wage be abolished, so every person gets paid what they are willing to accept?  Do you think your opinion depends on how much you’re currently earning (that is, those earning minimum wage are more eager to boost their own income, while those earning much more are thinking more about higher prices at the supermarket)?

Comments

  1. Let me qualify my opinion by saying that I am not personally unemployed nor is minimum wage a direct issue in my life. I might have a different opinion if I was more directly affected.

    That being said, I think that doing away with minimum wages would have long term positive effects. Immediately, as you said, higher employment would occur. All workers would know that they are working for what they deserve, so they would hopefully be motivated to work harder instead of settling for an arbitrary government set wage. Prices would go down, which would spur more buying which would help more businesses prosper and hire even more employees.

    Basically, I believe in free enterprise economics, so if the market dictates wages (instead of government), our economy would be better off.

    This is pure conjecture on my part, of course, but it is what makes sense to me.

    Good post on a timely topic.
    .-= Joe Plemon´s last blog ..Why to Build Wealth…Five Wrong Reasons and One Right One =-.

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