Why are You Paying me Minimum Wage?A Look into the Intricacies of the
Minimum Wageby Maniza, Linh-Lan, Geena and Sukanya
With summer fast
approaching, you may be starting to look for a job. Maybe that’s even how
you will be spending your spring break. Most likely, a majority of the
jobs that you will consider are going to be jobs that pay minimum wage (or if
you work in the food industry, even less!). Minimum wage is defined as
the lowest wage permitted by law or by a special agreement (such as one with a
labor union) that employers are required to pay their workers. The graph below
illustrates the effects of a minimum wage:
For you, a minimum wage
probably appears to only have negative effects (less money and more hours
working). But, just like all things, there is a cost and benefit to
having minimum wage at its current rate of $7.25 per hour.
Governments impose a
minimum wage for a variety of reasons. Some of the immediate advantages of a
minimum wage are an increase in the standard of living of workers, a reduction
in poverty, and inequality in the social infrastructure.
However, there are also
various disadvantages of a minimum wage too. Some of these include
unemployment, formation of a black market, and cost-push inflation. A minimum
wage can lead to cost-push inflation because firms face higher costs of
production, which could be passed on to consumers in the form of higher prices.
Therefore, while imposing a minimum wage, a government needs to weigh the costs
and benefits and make a decision that maximizes the general welfare of the
society.
The immediate problem
associated with a minimum wage is a rise in unemployment. This is clearly
demonstrated in the diagram above. “Lo” is the equilibrium quantity of labor in
the market when the wage rate is “Wo”, i.e. before a minimum wage is imposed.
However, when a minimum wage of “W1” is imposed, the quantity of labor demanded
falls to “L2” since less firms are now willing to hire workers at the higher
wage rate. On the other hand, the quantity of supply of labor rises to “L1”
since more workers are now willing to work at the higher wage rate. This
creates a surplus of labor equivalent to “L2 - L1”, which gives rise to
unemployment in the workforce.
To fully understand the
idea behind minimum wage, you first need to think about what labor actually is
and how it is represented for workers and employers. The cost of labor
(working) versus leisure (relaxing) may appear more complicated for you than
when you look at the consumption of other goods. But, it is actually
quite logical. Generally, when you hear that your wage will go up you
want to work more to make more money. This is especially true if you have
a job that pays minimum wage. But is this always true? Not necessarily.
Increasing a person’s wage
to increase the amount of time that they spend working is only effective up
until a certain point. For example, if you are getting paid $7.25 an hour
and your wage increases to $10, you will most likely want to work more hours.
As your wage goes up, you will want to substitute away from the
relatively more expensive good (leisure). At this point, the substitution
effect is greater than the income effect.
But, after a point, a
person’s wage becomes high enough that they feel comfortable working fewer
hours. For example, if your wage went from $7.25 to $50 per hour, you
probably wouldn’t work as many yours. At this point, the income effect is
larger than the substitution effect. The new wage is high enough to allow
you to “consume” more leisure.
The graph that displays
this concept is the backwards-bending labor supply curve pictured below.
With this idea that
increase the wage might actually result in fewer hours worked, let’s talk about
minimum wage specifically. There is a potential danger in just increasing
the wage for total hours worked because employees might not want to work as
much if the income effect is greater than the substitution effect. It’s
not guaranteed that the worker will work more or less.
But, if an employer
increases the wage for extra amount of hours worked, the worker will pick up
some extra hours. This is called overtime wage. The reason
that we know that the overtime wage will result in an increase in the amount of
time spent working is because there will just be a substitution effect.
After you work your normal amount of hours, the original budget wage line
will have a kink in it with the overtime wage having a steeper slope.
This prevents the income effect from taking place because your “new”
budget line is conditioned you working at an amount on your original budget
line. This is why it may be more beneficial for companies to keep minimum
wage and simply pay employees overtime.
Minimum wage is a
government-mandated floor on the price of labor. The U.S. government has been
holding it at $7.25/hour since July 2009, although President Obama has
considered raising it. Since some people claim that receiving minimum wage
doesn’t actually provide you with a liveable wage, various efforts have been
carried out to find a solution.
On the one hand, an
increased minimum wage enables workers to have a better standard of living,
encouraging them to have better healthcare, better nutrition, and better
education for the whole family. The White House states that a higher minimum
wage can stimulate productivity while reducing strikes and that firms should
not have difficulty adjusting to the new policy (Washington Post). On the
other hand, one possible outcome is that firms and companies might not want to
hire as many workers, especially those at entry levels (who are mostly
teenagers and recent graduates).
A limited workforce and
competitive application pool are harbingers of increased an unemployment rate
or the emergence of black markets, which consequently brings about other social
and economical issues. One of the negative effects that a minimum wage has is
the ability to increase the number of participants in the black market, in
which goods and services are traded illegally. Whether the wage is set low or
high, some individuals may be willing to work below minimum wage for the sake
of employment. This is illegal, but the choice to work in the black market for
some individuals seems rational, as it is more preferred to unemployment. The
government, which sets the minimum wage price, may value certain work an X
amount, but employers may value it for less, which is why they are willing to
maintain a black market. An example of an underground economic activity would
be a domestic cleaning aid who is an illegal immigrant. Having a cleaning lady
(or man) itself is legal, but not if she (or he) works in the US illegally.
However, the consumer may have a high enough demand for the service to not care
about legality, and the cleaner demands employment enough to agree to enter the
black market.
This
all seems so detailed when all you want to do is make some extra money over the
summer. But, it’s actually very important for people, especially for
people without degrees, to understand the intricacies of the minimum wage.
Although each and every government would want to ensure the highest profit and
benefit for the people, it does not mean there should be the highest wage per
hour for everyone. Instead, policy makers should be able to evaluate these
effects and adjust minimum wage accordingly. So, next time you go for a job and
hear that you will get minimum wage, think about everything that you now know
about it, and decide what the best choice is for you.
No comments:
Post a Comment