Minimum Wage Policy and the influence i

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Minimum Wage Policy and the influence it has on the economy
As wage is one of the key elements to which people attach greatest importance when finding and choosing a job, wage policies of a country can do a lot more to the economy of the society in many aspects such as employment, productivity, inflation than we people often thinks they can.
Every country has its own wage policies, which is due to their political structure and many more other factors. Different wage policies have different influence to various extents and in various fields, and every one has its own advantages and disadvantages, so it can be a eternal goal and topic to make up for one’s deficiencies by learning from others’ strong points, although it seems a little imaginary or too difficult to achieve.
As the best-known policy by the popularity in the wage policies, the minimum wage policy is what I am going to focus on in this essay, and I will arrange the importance and influence of minimum wage policies in the various aspects in economics around it.
The difference among the minimum wage policies in different countries
By now, all the developed countries and most developing countries have formulated such policy or something with similar function. Although they are all about the minimum wage, their being put into practice and the details about the requirements, norms, general level, scope of application and the flaws in it and so on are all different, triggering the difference in their affects and results. Let’s take the minimum wage policies in China and in US as the example of comparing.
-Minimum wage policy in China
The function of wages as a regulator of national consumption level was paramount because China, like the USSR, had opted for the strategy of high investment and, though necessity, a corresponding neglect of the population’s consumption needs.1
According to the wage policies in China, the minimum wage policy is included which can be regarded as one important and sometimes effective part of the poverty-assistance policies and is well-known to have been introduced into China in

1

Jackson, S., & Littler, C. R. (2010). Wage trends and policies in China: dynamics and contradictions. Industrial Relations Journal, (Spring91, Vol. 22 Issue 1), 1–16.

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1990s, since when China has been the practise of minimum wages for over twenty years. -Minimum wage policy in US
Widespread discussion of increasing the minimum wage has recently sparked action. In 2013, laws to raise the minimum wage were approved in five states, the
District of Columbia, SeaTac (an airport zone) in Washington, and Montgomery and
Prince George’s counties in Maryland. To date in 2014, Connecticut and Delaware approved laws to raise the state minimum wage and over 30 states are considering minimum wage hikes.
While policymakers continue to debate the merits of increasing the federal minimum wage, it is important to understand the labor market implications of such a policy. Unfortunately, these very effects are controversial.
The variety amongst state minimum wages provides a natural experiment from which to learn. Nineteen states enforced minimum wages above the federal minimum of $7.25 per hour and thirty-one had minimum wages equal to $7.25 in
2013. This paper uses recent data to analyze the impact of raising the minimum wage on employment among the 50 states.2
How the minimum wage policy affect the economics
As wage polices are quite broad and abundant topics to do the analysis on, I’m going to focus mainly on the minimum wage policy and the changes it can bring to the economy in the society. And as in the present period, the minimum wage policy in China still has quite a lot to improve, I’m going to put the emphasis mainly on the remaining shortcomings and the disadvantages it may bring to us.
-Affect on Employment
It has turned out that the minimum wage policy has the largest impact on employment. We find that a 15 percent in- crease in the level of the minimum wage leads to a decrease in the employment rate of roughly four percentage points, which corresponds to roughly a 4.5 percent drop in the level of employment (Pries

2

Ben Gitis,(2014), How Minimum Wage Increased Unemployment and Reduced Job Creation in
2013, American Action Forum, March.2014, Research.

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M.& Rogerson R. (2005))3. The increase in minimum wage causes greater unemployment as the factor of production increases, and those unemployed can live on unemployment benefit based on the minimum wage policies, and the higher the level of the minimum wage is, the more unemployment rate will increase as the result of the general conclusion mentioned in the book that as is depicted and illustrated by the left figure If the wage is kept above the equilibrium level for any reason, the result is unemployment. Besides, it is hard to find the proper level of the legal minimum wage, as a result, it can be a quite common circumstance to make it too high, making the wage forced to remain above the equilibrium level, which is just as shown in the figure: the quantity of labor supplied rises to LS, and the quantity of labor demanded falls to LD. and the resulting surplus of labor, LS – LD, represents the increased unemployment.
So far comes the As the minimum wage rises relative to the prevailing median wage——that is, as the minimum wage becomes more binding-men hired at the minimum wage are increasingly likely to leave their jobs at any given duration.4
-Affect on Turnover
The standard model of competitive labor markets predicts an increase in employerinitiated terminations when the minimum wage increases and employers move up along their labor demand curves., which means that the minimum wage policy will to some extent lead to the rate and frequency of turnover. This can be seen as a not-so-overthought topic for many years, for which some economists get more interested and addicted to researches, further probes, and in-depth analysis.
Mixon (1978), for example, argues that minimum wages reduce employee-initiated quits for two reasons. First, the net benefits of turnover are reduced because of the reduction in the difference between a worker's currentwage and the expected wage
Pries M.& Rogerson R. (2005). Hiring Policies, Labor Market Institutions, and Labor
Market Flows. Journal of Political Economy.
3

4

Adapted from Grossberg, A. J., & Sicilian, P. (2004). Legal Minimum Wages and Employment
Duration. Southern Economic Journal, 70(3), 631–645.

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on a new job. Second, since firms are likely to be more selective when hiring into minimum wage jobs, the costs to the worker of searching for a new job are expected to be higher.5

-Affect on Inequality
As is mentioned above, employed people receive higher wage while those unemployed live on unemployment benefit, there, therefore, would be greater income inequality (the Lorenz curve in the right is used to represent income inequalityIn economics, which is a graphical representation of the cumulative distribution function of the empirical probability distribution of wealth, and was developed by Max O. Lorenz in 1905 for representing inequality of the wealth distribution.6), which will give rise to the decrease of the motivation for employee to work. After that, as productivity is directly proportional to motivation, there, with no doubt, comes the fall in productivity of the country. According to many researches, it can be told that the inequality of wages in urban China has increased in a high pace and to a great extent in recent years.7 Moreover, the weight of empirical evidence for developed countries suggests that the rising inequality of wages is demand-driven: technical progress has favoured skilled labour in production, and the supply of skills has not kept pace with the rising demand, which can be one of the sensible or kind of credible explanations of movement from one market equilibrium to another.
-Affect on Inflation
The increase in wage promotes the purchase of merit goods such as education, hence the human capital quality increases. It is that wage increase can arouse greater personal wealth, making people with higher wages think themselves to
5

Grossberg, A. J., & Sicilian, P. (2004). Legal Minimum Wages and Employment Duration.
Southern Economic Journal, 70(3), 631–645.
6
7

adapted from Wikipedia - Lorenz curve

Adapted from John Knight & Lina Song (2003). Increasing urban wage inequality in China,
Economics of Transition, Volume 11, Issue 4, December 2003, Pages 597–619

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have greater purchasing power and their tendency to buy will in that way rise as an result, giving birth to the inflation. Thus, it can be followed by the depreciation of money in the whole society and leads to the cycle mentioned above.
Conclusion
The minimum wage policy, as part of the wage policies having influences on a variety of factors and aspects in the economy and a commonly-used economic policy throughout the world, turned out to have the attribute to be a double-edged sword——whether it can improve or hold back the development of the economy is all based on how it is set up and put into practice with realistic details which are well fixed with the specific conditions of the specific countries or states. If it works in the proper way with careful adjustment and management, it can have the ability to increase the standard of living of workers, to reduce poverty and inequality and to force businesses to be more efficient. In contrast, if not, it may not only lose the improving benefits but also bring some worse effects such as increasing poverty, increasing unemployment (particularly among workers with low productivity) and damaging to businesses. In brief, one key point to take good use of this policy is to grasp the exact moderate and appropriate level to set the minimum wage policy and to do the proper monitor regulations according to the changes of the present economy.