Minimum Wage Effect

Minimum Wage and its effects on the Labor Demand Market

Beginning in 1938, the Fair Labor Standards Act introduced the federal minimum wage starting at 25 cents an hour. However, in order to reflect changes in the spending power of money caused by inflation, and increasing GDP (Gross Domestic Product) from increases in productivity, the minimum wage has been increased 22 times through the years to the current level of $7.25 per hour. The minimum wage was raised to its current level on July 24, 2009. “The minimum wage in 2014 was 24 percent below its 1968 level despite the fact that U.S. productivity more than doubled over that period and low-wage workers now have much more experience and education than they did back then. Now is the time to

address this historic weakness in the minimum wage by raising it and lifting the earnings of low-wage workers” (It’s Time to Raise the Minimum Wage).

There has been discussion during the past year among politicians about raising the minimum wage soon to around $15 per hour which would more accurately reflect the amount of money a worker needs to earn in order to live a lifestyle free of government entitlements.

With a raise in the minimum wage, benefits and consequences are incurred by both the employee and the employer. From the employee's’ perspective, they are always happy to get a raise in pay. In order to decide whether an increase in the minimum wage would be justified or not, we need to look at it from several different business perspectives. First, when the minimum wage rate is increased, low-skilled laborers will be more expensive to hire. This increase will have the greatest impact on businesses that need the

greatest number of low skilled laborers. This wage rate increase will most likely result in a competitive advantage for those businesses that require the fewest number of low-skilled employees. Second, higher minimum wage labor costs will allow a business to invest more in technology in order to reduce the number of low skilled employees they require. Restaurants are a good example of businesses with large numbers of low skilled laborers. According to an article by Andy Puzder in the Wall Street Journal, “To remain competitive, restaurants will need to reduce labor costs by eliminating positions, reducing employee hours, accelerating automation and slowing expansion” (Puzder). Third, increases in the minimum wage rate will make low skilled laborers more expensive and this makes it more attractive for businesses to move these low skilled jobs overseas where labor rates for these low skilled jobs are less. In order to keep these jobs in our country, the minimum wage can be increased without adverse effects only to the point where the legislated minimum wage is less than the equilibrium competitive wage of the foreign country where the jobs might be moved to.
In order to find out whether the increases in the minimum wage are necessary or not, we first need to know what it’s intended purpose is. Overall, the objective of an adjustment in the minimum wage should be to equalize labor supply with labor demand. “The wage’s proponents have argued that it exerts positive effects on labor market outcomes by reducing employers’ excessive market power. Its opponents, however, believe that labor markets are competitive and any wage regulation is bound to reduce employment, especially among low-skilled workers” (Rocheteau). Depending on whether the labor market is competitive or not is a determining factor in the effects of the minimum wage has on businesses. If the labor market is not competitive, employers have more influence on the wage decision. The employment effects of the minimum wage can be viewed under two different assumptions. The first assumption is that there are many different employers competing to attract workers. The second is that there is a single employer competing to attract workers. These assumptions give us two benchmarks in order to discuss specific situations and markets. “A perfectly competitive labor market is a composite of many firms that are in completion for workers. Firms have no power to set wages; the market determines a competitive wage. If firm deviates from this wage, it either pays less and loses works or pays more, sustains losses, and exits the market” (Rocheteau , ).
Technology plays a big role in the minimum wage as well. With a higher wage, labor costs can be invested more in the advancement of technology in order to reduce the total number of employees required to operate the company. Restaurants are a good example, as the growth of artificial intelligence which is used to take orders from customers has become a more popular way to conduct business transactions. “CEO Mark Barrenchea claimed that as many as 25 to 40 million jobs globally will disappear as a direct result of automation and what he called “extreme connectivity”. While a report by the World Economic Forum earlier this year found that the rise of robotics, artificial intelligence, and other technologies will result in a global loss of five million jobs by 2020” (Shah). Clearly, artificial intelligence would reach many other markets other than just the restaurant business. It would impact companies with factory workers as well as employees in technical support roles and cab drivers to hospital surgeons.
Just as the law of demand plays a role in the economy, it also plays a role in the labor market; the higher the wage the higher the unemployment. Just like anything in economics, the law of demand has its benefits and its cost. The benefit comes to those who are earning the higher income while the cost comes from imposing a price floor which makes it harder for people to find jobs. The relationship between wage and employment has been researched numerous times and has been concluded that the relationship depends on elasticity. If there is a unitary elasticity then no relationship exists whereas an inelastic labour demand tends to increase wages but decrease employment by the same percentage (Humphreys) . When looking at minimum wage you have to look at those who would be most affected by any kind of increase or decrease. Danziger states “these workers would therefore be best off when the minimum wage rate is set at a level where the aggregate demand for low-wage labor is unitary elastic,
and would be made better off by increases in the minimum wage rate as
long as the aggregate demand for labor is inelastic” (Danziger).
When looking at a minimum wage increase there are both pros and cons.

The pros that come with an increase minimum wage include increased penalty that employers pay to prevent overtime, increased earnings among the low-wage workers who keep their jobs and preventing employers from exploiting their employees. Some of the cons include reduced hours, increased unemployment from people no longer searching for jobs, and overtime that reduces the GDP (Hamermesh). According to the article “It’s Time to Raise the Minimum Wage,” raising the minimum wage will benefit more than one in four workers. An increase up to $12.00 “would pump billions of dollars into the U.S. economy, benefiting Main Street businesses.” The business would be affected by the increase spending from their consumers. It would also give those workers who are tipped as well earn a wage a chance to get out of poverty (It’s Time to Raise the Minimum

Wage).
In this past year, there has been a lot of discussion about whether the minimum wage should be raised to $15 per hour. While this would benefit some, like many things in the economy, there are several negative sides to such an increase. An increase in minimum wage would allow people to live a life free of government intervention and also increase the spending powers held by consumers. The downsides to higher minimum wage would mean the increase in A.I that is used to replace expensive employees. While there are several advantages and disadvantages to an increase in minimum wage, it is still up for debate what is the best move. However, when it comes to the relationship between wage and employment, Humphreys states “economists have been exploring the links between wage levels and employment for decades,
and there are literally thousands of studies investigating the relationship” (Humphreys).