Does imposing a minimum wage necessarily improve either incomes or economic surplus for invdividuals who would otherwise have been paid below the minimum wage?

Nottingham University Business School

MSc Programmes International Business

TITLE OF MODULE: Business Economics (N14B37)

Title of Work: Does imposing a minimum wage necessarily improve either incomes or economic surplus for invdividuals who would otherwise have been paid below the minimum wage?

NAME: Ivanov Ilia

Student ID: 4212722

COPY: 1
Word count: 1472
Introduction
Minimum wage is one of the most studied topics in economics (Stigler, 1946; S. Marginean and A. S. Chenic, 2013; R. Boadway and K. Cuff, 2001). Minimum wage is the lowest level of earnings for employees set by government legislation. The debate on minimum wage has focused for many years on the effects of introducing and raising minimum wage on labor market and economic surplus. In general, there are two arguments the minimum wage, concerning fiscal and social. Supply side economists see a minimum wage as an overreaching burden placed on small businesses while demand side economists argue wages set too low will result in higher levels of poverty. The minimum wage directly affects small businesses. A large amount of their earnings go directly to pay for operating expenses, such as equipment, supplies, lease or mortgage, credit lines, inventory, and employee wages and benefits. The single largest cost to small businesses is the employee wages and benefits. However, if a higher minimum wage is imposed, they must hire fewer employees or downsize to comply with the minimum wage law, which has a direct impact on unemployment rates. On the other hand, research conducted by the Heritage Foundation in 2003 found that raising the minimum wage would not curtail poverty levels. "Review of the Census data indicates that less than one-third of those affected by the proposed new minimum wage work full time", this group classified as Group A in this paper. This means 66 percent of minimum wage earners are part-time employees and do not rely on their income to sustain current or higher living standards, which translates to a slight increase in consumer spending but does not positively impact poverty levels or individuals’ welfare. Group B is classified as these 66 percent. This paper examines both groups of the low-wage labor market, but it is more relevant that nowadays the welfare of Group A is more important than the Group B, in which people do not rely on their income.
The questions attempted to be answered in this paper are: what is the impact of imposing a minimum wage for the individuals? Will this action necessarily improve either incomes or economic surpluses for them? In other words, how the social welfare of the individual will be affected.

Effects of the minimum wage
To better understand the consequences of imposing a minimum wage, it sould be taken into account that despite Group B is not poor, Group A lives at the poverty level and possible unemployment. In general, the most common view amongst economists is that a minimum wage will reduce employment in a competitive labor market. For example, Stigler (1946) noted: “The higher the minimum wage, the greater the number of covered workers who are discharged”. From this point of view, labor input can be thought of as total hours and total hours is defined the product of workers and hours per worker. In fact, as it is mentioned in the work of E. Strobl and F. Walsh (2011), the impact of minimum wage on hours per worker, hours worked and number of workers is ambiguous. They argued that in a competitive model it comes from how companies choose combinations of hours and workers, and on the other hand there is possibility that minimum wages may increase employment in a monopsony model (E. Strobl and F. Walsh, 2007). Thus, the effects are ambiguous, when labor costs go up, employers hire fewer people or they fire few people. This finding applies to employers of both highly skilled and unskilled workers. Employers will not pay a worker more than their productive value to a firm. Businesses that do so quickly go out of business (J. Sherk, 2013). The first to lose opportunities are minority with the poorest job skills. As P. Kersey (2004) argued, those needing work experience are pushed out of the market before they can learn. Minimum wage laws are touted as protection for the low-income people, but sometimes laws cost them the opportunities they so badly need. Hence, the total welfare of this segment of labor decreases.
Increase in unemployment raises a question about redistribution of incomes and welfare between working and non-working / low-wage individuals. Therefore, changes of the minimum wage also affect government redistribution. According to R. Boadway and K. Cuff (2001), the minimum wage can “sever the incentive constraint that requires the working population to be no worse off than those not working”. Hence, this allows the government to increase redistribution from the employed to the unemployed or low-incomes’ and thereby enhances social welfare of low-wage people. However, actual minimum wage regimes and transfer programs typically make it illegal to pay less than the minimum wage and require welfare recipients to accept job offers (R. Boadway, K. Cuff, 2001). But, as with tax evasion, some welfare recipients undoubtedly turn down job offers without being detected, or perhaps do not take the effort to apply for them as usually required. Taking into account such behavior, the redistribution occurs not from high- to low-wage people, but only between low-income families. It follows, that the possible enhanced social welfare, now is reduced to zero or even worse.
Despite layoffs and unemployment, it should be clarified, what happens to those, who are not fired or already hired. As it was mentioned earlier, usually low-wage workers are those who do not have enough experience, skills. A. Leigh (2007) stated about one-third of such workers are the sole worker in their household. Such people live at or below the poverty level. The relationship between minimum wages and poverty has been examined empirically. And the results are mixed. D. Neumark and W. Wascher (2002) found that results indicate that minimum wages increase both the probability that poor families escape poverty and the probability that previously non-poor families fall into poverty. The estimated increase in the flow into poverty is larger. This implies that the overall level of income of poor families, which have at least one working individual, decreases. The other two-third of low-wage workers they do not live in poverty. As J. Sherk (2007) argued, “much of the benefit of a higher minimum wage accrues to suburban teenagers and college students, not the heads of poor families”. It therefore should not be surprising that higher minimum wages do little to benefit poor families when minimum-wage workers are only slightly more likely to be poor than is the population as a whole. In this occasion, it is possible to argue that imposing a minimum wage can increase the surplus for such workers.

Conclusion
Most of theoretical literature has conducted analyses of the impact of imposing minimum wages on employment or poverty. In addition, few economists, like S. Lemos (2009), distinguish the effects of minimum wage in developed and developing countries. While the scope of the effects are vastly different, the effects by themselves are very similar.
This paper argues that the effects of minimum wages are very ambiguous, due to the fact that different types of social groups are affected. The lower surplus of the low-wage people who are fired or those who have more difficulties to find a job, because of minimum wage. At the same time, the higher surplus of the majority of low-wage people who do not rely on their income and are not from poor families. It should be mentioned, that total economic surplus for these individuals might be higher than it was before, but the problem of poor low-wage people is much more important. However, the topic of minimum wages also affects the problem of government redistribution. On net, the various trade-offs created by minimum wage, like increases, more closely resemble income redistribution among low-income families than income redistribution from high- to low-income families. Therefore, the surplus of low-wage individuals cannot change. Increasing the minimum wage will do little to improve the conditions of poor people and their economic surplus or welfare. Relatively few of those workers who receive wages at or near the minimum are members of poor families. For those poor who are working, wage increases are substantial and come quickly as they accumulate job experience, what can lead to improvement in incomes, but only for this part of low-wage group.
From these findings, the answer on the question, will the imposing of minimum wages necessarily improve either incomes or economic surpluses for people, who would otherwise have been paid less, is negative. For some groups of people either income or economic surplus can increase in terms of imposing minimum wage, namely Group B. But on the other hand there a lot of subgroups, mostly the full Group A, which are affected adversely. In this occasion, future researchers should make a strict division into groups, taking into account factors such as: employed or unemployed, social status, number of workers in the family, experience background and skills.

Books and references

G. Stigler
The economics of minimum wage legislation
The American Economic Review, vol. 36, 1946, pp. 358–365

Silvia Marginean, Alina Stefania Chenic
Effects of Raising Minimum Wage: Theory, Evidence and Future Challenges
Procedia Economics and Finance, vol. 6, 2013, pp. 96-102

Robin Boadway, Katherine Cuff
A minimum wage can be welfare-improving and employment-enhancing
European Economic Review, vol. 45, 2001, pp. 553-576

Paul Kersey
The Economic Effects of the Minimum Wage
The Heritage Foundation Research, 3 May 2004, e-source http://www.heritage.org/research/testimony/the-economic-effects-of-the-minimum-wage#_ftnref5 James Sherk
Raising the Minimum Wage Will Not Reduce Poverty
The Heritage Foundation Research, 8 Jan 2007, e-source http://www.heritage.org/research/reports/2007/01/raising-the-minimum-wage-will-not-reduce-poverty Eric Strobl, Frank Walsh
The ambiguous effect of minimum wages on hours
Labour Economics, vol. 18, 2011, pp. 218-228

Eric Strobl, Frank Walsh
Dealing with monopsony power: employment subsidies vs. minimum wages
Economics Letters, vol. 94, 2007, pp. 83-89

James Sherk
What is Minimum Wage: Its History and Effects on the Economy
The Heritage Foundation Research, 26 Jun 2013, e-source http://www.heritage.org/research/testimony/2013/06/what-is-minimum-wage-its-history-and-effects-on-the-economy#_ftn44 Andrew Leigh
Does Raising the Minimum Wage Help the Poor?
Economic Record, vol. 83, 2007, pp. 432-445

David Neumark, William wascher
Do minimum wages fight poverty?
Economic Enquiry, vol. 40, 2002, pp. 315-333

Sara Leimos
Minimum wage effects in a developing country
Labour Economics, vol. 16, 2009, pp. 224-237