Impact of Increasing Minimum Wage Rates Research Paper

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Abstract/ Introduction

Minimum wage increases have not kept pace with real wages, according to testimony given before the U.S. Senate Committee on Health, Education, Labor and Pensions (Dube, 2013). As a result of what amounts to a declining minimum wage, there is rising inequality mainly in the bottom tier of the pay distribution. Some believe that raising the minimum wage would help to close the gap and reduce inequality. Others argue that raising the minimum wage would only worsen the economic conditions that prevail today, drive employers to lay off workers or offshore more jobs, and drive the prices of goods up for consumers as the cost of labor is passed on to the customer. This paper will examine the impact of increasing minimum wage rates and what effect it would have on employers and employees, the local economy, the global economy and on consumers.

Effects on the Employers and Employees Due to the Increase

What do economists think of a wage increase and its effect on employers and employees? Economists are divided on the issue. According to Employment Policies Institute (2007), the low-skilled workers will be worst hit by a minimum wage increase: “Over 73 percent of American Economic Association labor economists believe that a significant increase will lead to employment losses and 68 percent think these employment losses fall disproportionately on the least-skilled. Only 6 percent feel that minimum wage hikes are an efficient way to alleviate poverty” (Employment Policies Institute, 2007). In other words, the majority of economists believe wage increases would hurt both employers and employees. However, there are other economists who hold the exact opposite position.

Thus, according to most economists surveyed by the Employment Policies Institute, employers would be forced to turn to high-skilled workers in order to make ends meet and so all the low-skilled workers would be let go. This would lead to an increase in unemployment that would cause the economy to be worse off than before. According to others, like those at the Economic Policy Institute (2018) believe a wage hike would help employees: they say that “a $15 minimum wage by 2024 would result in $121 billion in higher wages for 39.7 million low-wage workers, which would also benefit their families and their communities”—but they are silent as to the effect it would have on employers.

How Do Economists Think the Increase Will Affect the Local Economy?

The majority of economists believe the minimum wage hike would lead to an increase in unemployment and a downturn in the economy as more people would be out of work and rely on government subsidies. The alternative to this problem is to increase the Earned Income Tax Credit. Rather than raising the minimum wage, the government should give workers a tax break so that they could keep more of the money they earn. This would lead to more gains in employment as it would allow employers to keep more workers (Employment Policies Institute, 2007).

Economists at the Economic Policy Institute (2018) on the other hand believe a wage increase would be a good thing for the economy. They state that “since lower-paid workers spend a large share of their additional earnings, this injection of wages would modestly stimulate consumer demand, business activity, and job growth” (Economic Policy Institute, 2018).

Other Views of Increasing Wages

Other views are that increasing wages will be unlikely to do anything to make prices more affordable or to prevent inflation from occurring. Dube (2007) points out that “adjusted for inflation, the real minimum wage has fallen from a high of $10.60 in 1968 to $7.25 in today’s dollars.

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” The problem is that inflation is not going to stop. As the Federal Reserve is still likely to print more money in the future when the next recession hits and use those dollars to buy up Treasuries and boost asset prices, the value of the dollar will plummet and the purchasing power will decline. What once looked like a great wage hike will then be just another low wage. Increasing wages is only a temporary fix on a permanently bad situation.

Effects on the Consumers

What Economists Think Wage Increase will Have on Consumers

Again, here economists are divided as well. Some believe raising the minimum wage would boost consumer spending (Filion, 2009). Others say it would hurt consumers (Sunde, 2018). Economists at the Economic Policy Institute argue that wage increases generate more spending: they point to a study released by the Federal Reserve Bank of Chicago which suggested a correlation between wage increases…

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…of their lives (Economic Policy Institute, 2018). Food costs could go up, healthcare could go up, education prices could go up, rents and housing payments could go up, interest rates could go up making everyone’s debts more costly to carry. These costs have to be considered, too, so an increase in wages has to be balanced against the real world picture.

Negatives

Negative outcomes of wage increase on the global economy could potentially be a spiral effect of price increases across the board, as producers pass on costs to suppliers as well, refusing to pay higher costs for goods. This could cause consumption to halt by big producers who rely on cheap rates in order to keep operations going and to stay cash flow positive. Without cash flow and margins protected, large companies and businesses will find it difficult to continue operations. A domino effect could commence that puts one business after another out of business. Thus, as companies are squeezed at home due to wage increases, the global trade of supply and demand could be hit as well, as the first domino that falls will likely fall into another and it into another. A chain reaction of negative consequences could result for all businesses are essentially interconnected and dependent upon the health of one another at some level.

Conclusion

In conclusion, wage rate hikes could be good or bad for the local and global economy, depending on how one chooses to look at it and what data one chooses to consider. Likewise, wage increases could be good for employers and employees or it could be bad—again, economists are divided on the subject. Part of the problem is that there are so many different data points to consider that it is somewhat of a guessing game to actually say what is happening in the economy, whether local or global, at any given point in time. The more money that consumers have to spend can be seen as a positive in one sense, but it can also be seen as a negative in another light. It depends on whether the economist is simply looking at the amount of money that is being accumulated or if the economist is looking at how employers will pass the costs on. Additionally, there are far….....

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