Minimum Wage Dispute: A Balanced Review.
Introduction
“The minimum amount of remuneration [money] that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”. [1]
It is widely known that policies surrounding minimum wage serve the critical role of protecting workers from unfairly low salaries. By settling a minimum threshold on wages, workers on lower socioeconomic layers are safeguarded from the inherent brutality of an unregulated capitalistic system. These policies help to ensure that fundamental human values such as equality and freedom, are protected under the law….blah, blah, blah. We all know what it is. We all seem to know why is it there. We all -hopefully- support it and maybe even celebrate its existance. Yet, the conflict over what the appropriate threshold should be, remains one of the most contentious issues of the 21st century. Why is this the case? Why people don’t just agree for a higher minimum wage? What are the hidden implications? In this article, I will explore these issues and attempt to provide a balanced analysis on the debate surrounding minimum wage policies.
History
For all the nerds out there, myself included, who want to know how and why someone woke up one day and decided to implement policies surrounding minimum wage, this chapter is for you. I came across an exceptional article from the International Labour Organization, that covers the essentials when it comes to the history of minimum wage. I've directly cited a shortened version of it:
“Initially, minimum wages covered relatively few categories of workers and sought to protect those considered to be especially vulnerable. New Zealand was the first country to implement a minimum wage in 1894 […] and the UK in 1909. […] After the WW2, the number of countries with minimum wages expanded. […] The legal coverage of minimum wages was progressively expanded as it was increasingly felt that all workers, as a matter of right, should receive protection against unduly low wages. In the US, coverage expanded from about 20 per cent of the workforce in the early years to nearly 80 per cent in 1970. […] The economic and intellectual contexts of the 1970s and 1980s brought this expansion to a halt in some countries. The UK dismantled its wage councils in the 1980s. In recent years, minimum wage systems have been established or strengthened in many countries to address working poverty and inequality. The UK introduced a new statutory minimum wage with national coverage in 1999. […] Many developing and emerging economies also established or strengthened minimum wages. China adopted a minimum wage in 1994 […] followed […] by Macao (China) in 2016. […]” [1]
Implications
Why people don’t just agree on a higher minimum wage. Seriously, why don’t we force the rich enterprises and corporations to give back as much as possible to toilers who are constantly fighting to stay above the line of absolute poverty?
Well, that may seem like an obvious claim but it’s quite naive. First of all, not all enterprises are inherently rich. The vast majority of them are actually small and medium sized enterprises (SMEs), whose revenue’s rarely reach the hundred thousand range, and their employer count is no more than a quarter thousand. Not to mention the local barbershop or grocery store, that struggles to bring even a single piece of bread at the table [1].
Even if we don’t take that into consideration, which is wrong on so many levels, major economic implications arise from tilting the minimum wage balance to either side. These implications are quite complex and may be difficult to understand for someone who lacks relevant knowledge. That’s why I made an attempt to break those down into digestible segments, that are hopefully comprehensible by everybody. To address the initially posed question, Why people don’t just agree on a higher minimum wage?, I will move on to present the advantages and the disadvantages of implementing a higher minimum wage.
Beginning with the most fundamental argument in favor of the minimum wage; the increase of purchasing power of minimum wage workers. This can be understood as a direct consequence of their salary increase, which enables them to purchase more things or more expensive things. Stronger purchasing power gives birth to multiple other benefits, some of which are discussed below.
One immediate impact of higher wages is that people having more money to spend, means they spend more money. Simple right? Not so much. Increased spending is associated with the so-called “multiplier effect”: People buying more drives up production of goods, which leads to stimulation of businesses, particularly SMEs, which in-turn offer greater products that attract more customers. As a result, consumer spending increases once again, creating a circular and exponential pattern, that constitutes economic growth.
On that note, the business stimulation itself can lead to several other benefits. For instance, employees now enjoy their ability to spend more, which increases their overall morale. This is significant, as low employee morale can lead to diminished job performance and ultimately hurt businesses, causing economic decline.
Another great benefit of increasing the minimum wage is the decrease in demand for governmental financial aid. This is a significant benefit both for the state, as it reduces the burden on government resources, and for the rest of us, as the freed-up resources can now be allocated towards other important areas such as education, healthcare, infrastructure, and public safety [2].
“A 2019 Congressional Budget Office (CBO) report projected a significant improvement in the standard of living for at least 17 million people, assuming a minimum hourly wage of $15 by 2025, including an estimated 1.3 million people being elevated above the poverty line.” [2]
The arguments used against increasing the minimum wage can be somewhat more complicated as they are often based on indirect reasoning. For starters, the major argument used by the opposition, is related with the concept of inflation [4]. If you are not aware it, it will be somewhat challenging for you to completely understand the core argument presented.
Opposition argues that raising the minimum wage will eventually result in broad increase in the salaries of all employees, including senior employees. This is anticipated as more senior employees will demand from the company to maintain their pay difference. Imagine a company that pays its minimum wage employees 800$, its promoted employees 1000$ and its senior employees 1200$. In an event of a policy being applied that changes the minimum wage threshold to 950$, promoted employees will not just feel as the pay difference with their juniors is unfairly shrunken, they will also feel that their extra 50$ are not worth the increased effort and responsibility that comes with their elevated position. Therefore, higher minimum wage can force companies to broadly increase their employee’s salaries, setting a new floor for wages.
This new wage floor can be an extra financial burden for companies, requiring them to dedicate a larger portion of their revenue to salaries, which must be compensated in some way. Companies can use one of two methods to compensate for this increased cost:
- Increase their revenue stream by increasing the pricing of their offered product or service. Increased prices in the entire market, can lead to general increase in the cost of living (inflation [5]). This could essentially negate any advantage gained by the increased minimum wage. And when it comes to minimum wage workers, such an advantage is crucial for their survival.
- Cut down jobs, which is unfortunate but often necessary for SMEs that cannot systematically reduce the offered salaries due to the presence of a high minimum wage [2]
“The 2019 CBO report estimates that raising the minimum wage to $15 an hour by 2025 would result in the loss of approximately 1.3 million jobs. The numbers could be substantially higher if companies made a major move toward outsourcing more jobs to less expensive labor markets outside the country.” [2]
I hope to have at least convinced you that the question "Why don't people just agree on a higher minimum wage?" is oversimplified and lacks consideration for the complexities at hand. It is true that increasing the minimum wage is expected to lift individuals out of poverty and improve employee morale, but there are also potential negative implications that need to be considered. Below you can find a diagram that swiftly summarises everything (blue in favor and red against increasing minimum wage):
Political Perspectives
The Left and the Right in politics generally have differing views on the threshold of the minimum wage, with the Left typically advocating for a higher minimum wage and the Right typically advocating for a lower minimum wage. There are a few reasons why this division exists:
- The Left typically thinks that government should play a larger role in regulating the economy and protecting workers, whereas the Right believes that government and the free market should play a smaller role. A higher minimum wage is seen by the Left as a way to help low-wage workers earn a living wage, while a lower minimum wage is seen by the Right as a way to reduce labor costs for businesses and promote economic growth.
- The Right frequently expresses concern that raising the minimum wage too high will result in job losses, as businesses may be forced to lay off workers or reduce their hours to cover the increased labor costs. The Left, on the other hand, may see job losses as a necessary trade-off in order to ensure that low-wage workers earn a living wage.
- The Left is more concerned about poverty and income inequality, and believes that raising the minimum wage will help to alleviate these issues. Poverty and inequality may be viewed as primarily the result of individual effort and merit by the Right, and they may be more skeptical of government intervention to address these issues.
- The Right is more supportive of business interests, and a lower minimum wage is seen as a way to reduce labor costs and promote economic growth. The Left may be more skeptical of business interests, and a higher minimum wage is seen as a way to ensure that workers are fairly compensated and that businesses do not exploit low-wage workers.
“The differences between Left and Right regarding the economy can be attributed to both their differing attitudes towards equality and the role of government in economic affairs. The Left tends to support policies that address financial inequality through wealth redistribution, such as progressive taxation (higher rate taxation for higher income individuals) and higher minimum wages. On the contrary, the Right supports policies that promote financial inequality and market competition, such as lower taxes and lower minimum wages.” [3]
Conclusion
In this article, I have explored the contentious issue of the appropriate level of the minimum wage. I have explained the history of minimum wage policies across different countries, which initially covered relatively few categories of workers and sought to protect the vulnerable. I have discussed the implications of implementing a higher minimum wage, including the potential increase in the purchasing power of minimum wage workers and the possible negative economic implications such as layoffs and higher costs of production. I suggest that a balanced analysis of the debate surrounding minimum wage policies is required to make informed decisions on this issue.
References
- www.ilo.org. (n.d.). Minimum wages (Minimum wages). [online] URL: https://www.ilo.org/global/topics/wages/minimum-wages/lang--en/index.htm.
- Maverick, J.B. (2022). What Are the Pros and Cons of Raising the Minimum Wage? [online] Investopedia. URL: https://www.investopedia.com/articles/markets-economy/090516/what-are-pros-and-cons-raising-minimum-wage.asp
- Politics. Simplified. (n.d.). Politics. Simplified. [online] URL: https://emilianospanayiotou.blogspot.com/2023/04/politics-simplified.html#more:~:text=upon%20numerous%20policies.-,Economy,-The%20differences%20between
- [youtube] (n.d.). INFLATION, Explained in 6 Minutes. [online] URL: https://www.youtube.com/watch?v=zIbNJCSCEjk&ab_channel=JohnnyHarris
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