Ever since the first modern minimum wage law implemented by the government of New Zealand in 1894 (Starr, 1993), the effects of minimum wage have been widely debated. Minimum wage is the minimum price which a firm may hire workers. The proponents of minimum wage focus on the exploitation of workers and income inequality while opponents believe that minimum wage will cause unemployment. The wages of workers are important not only because it controls the standard of living one has, but also it determines the level of consumption in an economy. This essay seeks to argue that minimum wage is beneficial to society and should be implemented as it protects low-wage workers from exploitation, it is an effective stimulus to the economy, and that the unemployment argument against minimum wage is unfounded.
Minimum wage protects the low-wage workers in our economy against exploitation from firms. Firms operating in a free market are concerned primarily with maximising profits. To do so, firms would lower the wages of workers as far as possible, leading to exploitation. The lowest paid workers generally consist of the less educated and less skilled. This makes them the easiest to manipulate and hence the most vulnerable members of our society. To address this problem, the government can intervene by implementing a minimum wage, ensuring that each worker’s standard of living is at an acceptable level. The benefits of minimum wage affect a large number of workers. In 2009, when the federal minimum wage in United States of America (USA) was raised from $5.15 to $7.25, about 4.5 million workers received a raise, increasing the annual wages by $1.6 billion (Filion, Economic Policy Institute, 2009). The increase in their wages are also crucial to their families since the average minimum wage worker brings home 54% of his or her family’s spending (Filion, Economic Policy Institute, 2009). This clearly shows that minimum wage would not only support low-wage workers financially, but it would also benefit their families. Since it is the job of the government to protect its citizen’s interest, the government should therefore implement a minimum wage rather than leaving it completely up to firms, whose only motive is to maximise profits, often at the expense of its workers.
Minimum wage can also act as a stimulus for the economy. When the wages of workers are raised, it increases their ability to purchase goods and services in the economy. This raises the demand of goods and services. Firms, concerned with maximising profits, would increase their production to sell more. To do this, firms have to hire more workers and buy more capital inputs, thus generating more jobs in the market. When the federal minimum wage in the USA was increased from $5.15 to $7.25 in 2009, household consumption increased by $10.4 billion (Filion, Economic Policy Institute, 2009), thus creating jobs for other Americans and promoting economic growth. Household consumption is an important component of Gross Domestic Production (GDP), amounting to 36.6% of total GDP in Singapore in 2015 (Singapore Government, 2016), and 71% of total GDP in USA in 2013 (Federal Reserve Bank of St. Louis, 2016). From the size of household consumption, we can clearly see that it is an important component in the economy and irreplaceable for economic growth. The more people are able to spend, the higher the amount of money flowing into the economy, resulting in higher economic activity and higher employment. Thus, minimum wage is an effective stimulus to the economy, and should be implemented to promote economic growth and job creation.
One of the biggest argument against minimum wage is that it results in unemployment. With a minimum wage, low-skilled and low-wage workers are now comparatively more expensive than other inputs like capital or equipment. To maximise profit, firms would choose to substitute these low skilled workers with cheaper machinery. Firms may also choose to hire less low skilled workers and more high skilled workers. This makes the minimum wage policy counter-productive as it results in fewer jobs for the very people it is intended to help. However, 2 recent meta-studies, which analysed hundreds of studies conducted since the early 1990s, concludes that the implementation of minimum wage has little to no impact on the employment prospects of low-wage workers (Schmitt, 2013). This is due to the fact that the cost increase due to minimum wage is relatively small compared to most firms’ overall cost (Schmitt, 2013). Firms also have many other channels of adjustment to offset the cost increase, with cost savings resulting from reduced labour turnover being the most significant (Schmitt, 2013). Other channels of adjustment include reducing pay of higher paid workers, taking action to improve labour productivity and simply reducing the working hours of workers (Schmitt, 2013). These meta-studies show that the implementation of minimum wage is not counter-productive as the employment prospects of low-wage workers are not compromised. This strengthens my belief that the implementation of minimum wage is beneficial to society.
In today’s world where most countries are moving towards capitalism, the issue of minimum wage is a heavily debated topic. If left completely to the free market, employers will pay a wage as low as possible, threatening the livelihood of these low-income workers. The government has the responsibility to protect these low-educated and low-skilled workers. Hence, they should consider minimum wage as part of their policy as it would not only benefit low-income families, but it would also boost household consumption, fuelling economic growth. As President Obama once said, ‘nobody who works full-time should ever have to raise a family in poverty’ (Secretary, 2014). Anyone who works hard should be entitled to at least a decent level of standard of living and the implementation of minimum wage is one way to make certain of it.
- Federal Reserve Bank of St. Louis. (2016, October 8). FRED. Retrieved from https://fred.stlouisfed.org/series/PCE: https://fred.stlouisfed.org/graph/?g=hh3
- Filion, K. (2009, July 21). Economic Policy Institute. Retrieved from epi.org: http://www.epi.org/files/page/-/mwig/epi_minimum_wage_issue_guide.pdf
- Filion, K. (2009, May 28). Economic Policy Institute. Retrieved from epi.org: http://www.epi.org/files/2014/a-stealthy-stimulus-ib255.pdf
- Schmitt, J. (2013, Febuary). Centre for Economic Policy Research. Retrieved from cepr.org/: http://cepr.net/documents/publications/min-wage-2013-02.pdf
- Secretary, O. o. (2014, April 30). The White House. Retrieved from whitehouse.gov: https://www.whitehouse.gov/the-press-office/2014/04/30/remarks-president-raising-minimum-wage
- Singapore Government. (2016, Febuary 25). Department of Statistics Singapore. Retrieved from singstat.gov.sg: http://www.singstat.gov.sg/statistics/visualising-data/charts/share-of-gdp-by-expenditure
- Starr, G. (1993). Minimum wage fixing : an international review of practices and problems. Geneva: International Labour Office.
