This situation forces the employer or the business sectors to lay off the less productive workers, not to hire unskilled and less educated workers and hire only those with enough qualification suited for the wage (Katel, 2005). What drastic effect does this situation bring about is quite complicated. First, there would be fewer jobs available in the business arena. Less opportunities for the jobless brings an increase in the unemployment rate which is equivalent to less family income for the unemployed and poverty for the society in the long-run (Katel, 2005).
Second, this would yield to businessmen choosing more qualified individuals. More qualified individuals are skilled workers; skilled workers on the other hand are more or less educated workers or otherwise experienced ones. Educated workers are usually newly graduates or at least the young generation. This shall leave the adults unskilled workers not preferable for jobs which are considered as low wage jobs (Lee, 2002, page 1). If this is so, they would not have chance to work or would have a very small probability to be accepted in jobs which are under the minimum wage law.
It is either they settle with underpaid jobs or not to work at all. If that will be the case then poverty shall increase, since this people would have higher expenses and less income than what is needed to live substantially (Lee, 2002, page 1). Third, since businesses need to pay higher for the cost of labor, they would pass the expenses to the consumer which means that there would be higher prices in commodities and services.
Also, this sometimes results to lower quality in products or services, depending in how the employers and employees would react (Gindling & Terrell, 2006 page 8). This is because employees might need to work for longer hours or might be subjected to heavier or more task in a poorer working environment. The Living Wage Law versus State Pre-emption Law In 1994, Baltimore has enacted the “living-wage law” which helps to increase the local wages often higher than the minimum wage.
However, the state pre-emption law manages to block the effects of the living-wage law by preventing any local governments from setting the wage requirements in their state (Katel, 2005). This was organized by the American Legislative Exchange Council who believes that the living-wage is very expensive and costly especially in cases wherein there are only few workers who meet the requirements. Both the living-wage and the state-pre-emption laws are effective ordinances that give the citizens the power to control their respective states minimum wages depending on the labor market (Katel, 2005).
According to Gindling and Terrell (2007, pages 9-14), in the study made by Blackburn and Addison in 1999 they have found out that the increase in minimum wage have help minimize the poverty level of junior high school dropouts and teenagers, from 1983 to 1996. In the study made by Neumark and Wascher in 2002, through the use of US CPS data, shows that an increase in the minimum wage both have a positive effect on the probability of families to fall into poverty and to escape poverty. This shows that there is a redistribution of income among the poor (Gindling & Terrell, 2006, page 9-14).
Minimum Wage and Poverty in Latin America The research made by Gindling and Terrell also shows that the countries in Latin America usually associates higher minimum wage with a decrease in poverty however it is considered to have a positive relationship with the unemployment rate, thus it is believed not to be an effective legislation and strategy to reduce poverty. In the data used by Sagat in 2001, he concludes that the people in the poverty line are not much affected by an increase in the minimum wage and that it is those who are in the upper levels which are greatly affected.
The results of studies that uses micro-data, shows that increasing minimum wage has no actual and significant effect on the level of poverty even when the effects of unemployment are taken into consideration (Gindling & Terrell, 2006 pages. 9-14). In another study that was also mentioned in Gindling and Terrell’s research, Arango and Pachon have managed to prove that in Columbia, minimum wages helps in the improvement of the living condition of the families with high-income (Gindling & Terrell, 2006 pages 9-14).
The possibility of being employed, the range and hours of worked of women and less educated workers are affected negatively. However, in the study made in Mexico by Cunningham and Siga in 2006, they found that those who are under the poverty line are most likely to benefit from the increase in minimum wage (Gindling & Terrell, 2006 pages 9-14). The World Bank believes that the results of these studies differ with respect to the level of minimum wages in the respective areas. Accordingly, Columbia has higher minimum wage than Mexico.