Pros And Cons Of Minimum Wage

Minimum Wage and Macroeconomics

Introduction

Lots of people hear the term minimum wage and automatically assume it’s a good thing for the economy. From a macroeconomic standpoint, the ideal behind it is sound. Require companies to pay employees a minimum rate and more money will flow back into the economy. More money back into the economy means more of the company’s goods will be purchased. The increase in goods sold means more profit for the company. This concept sounds perfect, but most do not consider the adverse effects of a minimum wage. I have done some research, compared the pros and cons in order to see if it is actually a good thing for the economy.

History and Expectations

In the 1800’s, New Zealand suffered from numerous

This Act established the world’s first system of state labor arbitration boards (Industrial Conciliation and Arbitration Act 1894, 2016). This newly formed board had the power to settle union labor disputes and could also set wages. This laid the foundation for the minimum wage system.

In 1896, Australia adopted a similar board in order to resolve labor conflicts. The boards in Australia were initially created to only cover six industries that were notorious for paying a lower wage but evolved. By1907, Australia had passed the Ex Parte H. V. McKay which established the first set of minimum wages in Australia (Ex Parte H. V. McKay, 1907). Many countries followed by creating labor boards until the U.S. finally adopted a national minimum wage in 1938 (Minimum Wage Law, 2016).

In 1938, President Franklin D. Roosevelt signed the Fair Labor Standards Act. This act was the first of its kind in the U.S. The goal of the Act was to set a fair minimum hourly wage for all workers at $0.25 per hour, set the hours for a standard work week at 44 hours per week, set overtime standards, and establish age restrictions for the labor force (Fair Labor Standards Act of 1938,

The labor market will be receiving more money, unemployment will decrease, all workers will be at or above the poverty line. This means all is good in the economy right? History has shown that this in not necessarily the case. According to Mankiw (2006), “minimum wage causes unemployment, encourages teenagers to drop out of school, and prevents some unskilled workers from getting the on-the-job training they need.” What Mankiw means is that the system put in place to provide more money to the labor force is actually taking jobs away from the target group or eliminating the jobs altogether. With companies downsizing or automating jobs to control operating costs, the people that are supposed to benefit from minimum wage actually find themselves unemployed.

In 2014, the Wall Street Journal published an article that said many of the minimum wage workers come from higher income families and are usually not the primary income source of the household (Neumark, 2014). What this translates to is that, in most cases, the minimum-wage workforce consists of workers who are earning a secondary or supplementary income and are not the primary breadwinner of the household. No matter how you look at it, missing your target group and causing unemployment does not help bring poor families above the poverty line.

Theoretic Effects on the