greater equity in society. He also argued that there is a need to regularly review the level of minimum wages so that it reflects the living standards.
This is because the purchasing power of money is eroded over time with an increase in general price levels caused by inflation. Minimum wages has been a central debate in the American society since the inception of minimum wage legislation. It has attracted both academic and professional interest as various parties argue for while others argue against minimum wage legislation. This paper seeks to evaluate both sides of the divide.
As previously stated, the push to raise the minimum wage in America is not without opposition. Most notably, economists argue that if the minimum wage were to be raised across every state in the country, employers would have to increase prices of goods and services to compensate for the higher cost of employment. However, if the elasticity of demand does not allow, employers would have to bear part of the costs. Consequently, they have to lay off some workers to avoid the increase in production costs. Similarly, there is an inverse relationship between labor demand and the price of labor (wages). Therefore, raising the minimum wage results in a reduction in labor demand hence …show more content…
unemployment. Although this may sound like a strong argument, there have been numerous studies done to test this theory, and the argument just does not hold up. Research has shown that an increase in the minimum wage would not have any substantial effect on employment rates in America. In fact, a lot of businesses may even see a positive change resulting in a more stable employment rate. This is potential because raising the minimum amount of payment for employees will boost their morale and in turn result in a low turnover rate and higher productivity among employees. Another reason for a more stable employment rate as a result of raising the minimum wage is that if employees are happier with their paychecks, they will become the consumer. They are more willing to spend money on non-necessities, and the increased flow of revenue will allow businesses to stay afloat during the change, leaving them with plenty of money to hire and train new employees. As the number of consumers increases, so will the demand for goods and services, which will shift prices considerably lower. This results in a stronger and more stable economy than the United States has currently, raising the standard of living while simultaneously increasing employment and the morale of all citizens. Therefore, it becomes a win for employees and employers as well. Another argument that is regularly used against the increase in minimum wage is that the United States of America’s economy will be adversely affected with an increase in the minimum wage. The truth is exactly opposite – the American economy will flourish. When more citizens earn livable wage rather than desperately trying to make it to the next paycheck, there will be more money circulating. It should be appreciated that the poor have a high propensity to consume since they live on the margin. Therefore, it is easier to boost aggregate demand by increasing minimum wage. If increased, minimum wage workers will earn more and spend more. In addition, people who currently earn above minimum wage will also put pressure on employers to raise their wages as well. This will significantly increase aggregate demand in the economy. Businesses will also earn more money, as argued above, so they will be able to spend more money on hiring new employees who, in turn, will spend more money as consumers. The cycle is endless. The expenses used to support government-funded social programs including the food stamps program will decrease substantially, because most people who lean on those programs for support will be no longer need the extra help to survive. Since these programs are funded in part by taxpayer money, taxes, more money can be allocated for other programs to satisfy other needs and better help the United States of America as a whole.
Another argument in favor of minimum wages is the monopsony case.
A monopsony refers to where there is only one demander and many supplier of goods. In this case, it is the supply and demand for labor. A monopsony pay a low wage because he is the only demander. Increasing the minimum wage only extracts rents from the demander and increases supply of labor thus increasing employment. A minimum wage makes the employer a price taker and hence he behaves competitively thus increasing employment. This model perfectly fits the US economy because there are few employers and very many employees and potential employees. Brown, Girloy, & Kohen also argue that if employers are not productive they will experience shock effects of increase in operating costs with a minimum wage. This will force them to improve their productivity in order manage their operational costs. Therefore, the negative impact of minimum wage is mitigated.
In conclusion, minimum wage legislation has both negative and positive consequences on the economy. The demand-supply framework shows that minimum wage legislation results in unemployment. However, it should be appreciated that raising minimum wage increases aggregate demand hence boosting economic activities. In case of a monopsony, it will result in increase in labor demand. In addition, firm productivity may increase due to employee motivation and
shock-effects.