Effects of a Higher Minimum Wage

 

Introduction

Minimum wage is the lowest salary an employee is allowed by law to pay his/her lowest skilled worker.  The use of minimum wage as a tool to raise the wages of low income workers has being gaining momentum. Raising minimum wage also helps to bring income equality. The debate on the effects of a higher minimum wage on employment and long term GDP is an ongoing debate. A minimum wage has the potential to reduce income inequality as the lesser skilled workers at the bottom of wage distribution will earn more and their wages will be closer to those of the middle skilled workers.  Raising the minimum wage has the ability to shock the economy and bring about a ripple that will hurt low income earners. The economic theory has projected that the effects of a higher minimum wage are on the GDP are adverse.

Minimum wage is used by policy makers address public demands, to combat rising inequality, many of the workers who gain from minimum wage are individuals come from poor families with low income. Increasing this minimum wage leads to fewer employments. Most of the studies conducted show that low income earners who are the people with least skills are greatly laid off by firms when the minimum wage is increased (Sabia, 2015).

 When minimum wage is increased research conducted shows that the less skilled workers who are the low earning workers lose their jobs.  When minimum wage is increased to go beyond the equilibrium minimum wage it can cause unemployment because of the following two reasons: employers will be forced to lay off low skilled workers so that they can cater for inputs that firms cannot do without.  When the new higher wage and the new inputs come together the firms will be forced to increase the price of its products which will in return reduce the demand of the products thus lowering the labor demand.  The labor market is one of the most complicated markets but most important workers in this market have different skills and an increase in minimum wage will force employer to hire few low skilled workers compared to highly skilled workers (Neumark, n.d). However, firms will be forced to maintain few position for low skilled workers since the policy of minimum wage is employed to protect them.

 The effects of minimum wage increase are larger on a long term basis than the short-terms effects. In extreme cases some firms are forced to close rather than lay off its employees. Minimum wage increase reduces employment primarily through firms closing. An example is low quality restaurant closing following a minimum wage increase (Neumark, n.d).  If the labor market has only one employer (Monopsony), a higher minimum wage has the ability to increase employment. A higher minimum wage can also act as a motivating factor that will encourage the employees to increase their efforts.

 The chances of an increase in minimum wage affecting the economy of Ontario and Alberta are high because in Canada 8% of the population receive salaries that lie in the bracket of minimum wages.  If minimum wage rise it will reduce the level of gross domestic product since the increase in minimum wage will lead to higher real wages, which in return will push up firms’ marginal cost and thus inflation will increase as the firms try to adjust their prices in the short term (Neumark, n.d).  An increase in minimum wage will lead to a weak labor demand which will reduce employment and lower the hours worked by every worker.

 When firms are caught in crises after the minimum wage has been raised, their cost of production rises also, since the cost of labor which is a factor of production has risen.  In order to maintain the gap that existed between the wages of high skilled employees and low skilled employees firms are forced to maintain that gap by increasing the wages of the high skilled employees (Sabia, 2015). An increased minimum wage will make the employees to spend more thus causing demand pull inflation and the higher cost that will be incurred by firms will lead to wage push inflation.  Inflation means the prices have risen. This inflation will reduce the purchasing power of money which in return reduces consumption therefore lowering the GDP.

A higher minimum wage will increase the labor cost and output prices, lower the profits incurred by firms and bring about an adverse employment and hour effects each of which may lower the GDP. However, if a higher minimum wage will increase the earnings of the least skilled workers who keep their job and have a higher marginal propensity to consume the extra money than the owners of the firm or the least skilled workers who lose their job a minimum wage increase results in higher GDP (Sabia, 2015).

Conclusion

The minimum wage has been used as a tool to alleviate wages and income in equality. Raising this minimum wage has the ability to shock the economy and hurt low income earners and have an ambiguous effect of the GDP. Increasing the minimum wage decreases employment and mostly for low skilled employees.  Increasing the minimum wage can increase or lower the GDP depending on the factors in play.

 

 

 

 

 

 

 

References

Neumark D., (n.d). Employment Effects on Minimum Wages. Retrieved from;             https://wol.iza.org/articles/employment-effects-of-minimum-wages/long

Sabia, J. J. (2015). Do minimum wages stimulate productivity and growth?. IZA World of Labor,             (221).