Minimum wage - Economics

During 2014’s annual State of the Union address, President Obama aggressively addressed the age-old debate of raising the minimum wage. The President has urged legislators to raise the federal minimum wage to $10. 10 per hour to fight the ongoing battle of class inequality. Subsequently, Massachusetts legislators proposed a bill that would incrementally raise the state minimum wage to $10. 50 over the next two years just weeks after the President’s address. The prospects of this proposed legislation have left workers and liberals alike in Massachusetts rejoicing while employers and conservatives (all five of them) have balked at the bill. The following paper looks to examine this proposed bill and accompanying arguments for and against raising the minimum wage. The Massachusetts Minimum Wage On March 13 of this year, House Speaker Robert DeLeo proposed a bill to incrementally raise the current state minimum wage in Massachusetts from $8 to $10. 50 by the middle of 2016. Unlike the proposed federal legislation, however, the new minimum wage in Massachusetts would not be tied to future increases in inflation. The bill entails an increase in wages to $9 in July of 2014, followed by an increase to $10 in 2015, and ultimately, an increase to $10. 50 by mid-2016. This proposal, however, is not a new concept in Massachusetts by any means. In November of 2013, the state Senate passed a bill that would raise the minimum wage to $11, but the bill collapsed after it was left unaddressed in the state House of Representatives. Despite recent setbacks, Massachusetts legislators are confident that this new proposal will be passed into law this time around. The most recent proposed legislation regarding minimum wage has accompanying reforms that aim to offset the associated costs of raising the minimum wage for employers. These reforms include reducing the tax burden employers bear through reforming the state’s unemployment insurance and shielding employers from short-term fluctuations in employment trends. Despite these reforms, business leaders and conservatives still have exhibited opposition to the bill. Opponents to the proposed bill believe that there are major disparities in attempting to balance unemployment reform and minimum wage (Miller, 2014). The next section will examine the applicable economic implications of adjusting the minimum wage. The Economics of Minimum Wage The topic of minimum wages and its subsequent effects has been a widely debated topics in economics for centuries. Neoclassical theory suggests that when a mandated minimum wage increase is greater than the market-clearing wage, firms will reduce the quantity of labor demand, resulting in a reluctance to fill job vacancies, accompanied with a change in employment levels and subsequent increases in unemployment. This change in the quantity of labor demanded is contingent upon the magnitude of wage increases and the wage elasticity of demand within a specific industry. Ultimately, there will be workers who benefit from wage increases and consequently, workers that are negatively affected via the loss of employment. The latter workers are those whose marginal revenue product of labor no longer exceed their marginal expense of labor. In other words, wage gains of those who keep their jobs is offset by the wage losses of those who lose their jobs (Leonard). As economic theory would state, in monopsonistic industry, firms tend to exercise their market power and pay employees a wage that is less than their marginal revenue product of labor. Therefore, in practice, an efficient minimum wage that can increase both employment and efficiency should be set between the monopsony wage and the employees’ marginal revenue product of labor, similar to the implications of economic price theory (This is based off the assumption that firms are profit-maximizers). In reality, however, price theory differs from labor economic theory; therefore, this ideal minimum wage is rarely used in the real-world. Princeton economist Thomas Leonard concluded that raising minimum wages has minimal effects in poverty reduction or progressive income redistribution (i.e. closing the gap between the wealthy and the poor), thus failing to meet the primary objectives of a higher minimum wage.
Leonard does, however, suggest three ways that the goals of minimum wage can be attained. First, to offset the costs associated with a raise in minimum wages, employers can reduce non-monetary compensation, such as health benefits, resulting in no effects of unemployment. Additionally, employers can reduce the hours the hours of their employees rather than employment levels to combat the associated costs of raising the minimum wage. Lastly, Leonard observed that the affected workers of a raised minimum wage already have significantly volatile employment patterns; therefore, it is possible for the goals of minimum wage to be achieved for a large portion of the population (Hence, the conclusion that minimum wages do little for reducing poverty holds true) (Leonard). These economic principles will be referenced throughout the remainder of the paper to analyze the arguments for and against raising the minimum wage in Massachusetts. The next section will discuss the arguments for raising the minimum wage. Arguments for Raising Minimum Wage A recent study reported by Bloomberg shows that sixty-nine percent of Americans are in favor of raising the minimum wage (Linksey & Hunter, 2014). Governors Peter Shumlin and Dan Malloy relay three core arguments for raising the minimum wage. First, they argue that raising the minimum wage makes good economic sense. The current minimum wage of $8 in Massachusetts and $7. 25 federally is lower than it was in 1968, when adjusted for inflation. Economically, raising the minimum wage will provide millions of Americans with greater capital to spend and invest. Additionally, recent studies report that an increase in the minimum wage makes workers more productive and helps firms combat the associated costs of increased minimum wage, keeping their profitability indices level. Overall, an increased minimum wage would lead to economic activity and growth. The governors also believe that raising the minimum wage would be beneficial for women. With an increase in minimum wage, women would make up nearly two-thirds of workers who would benefit and observe increases in their income. As Shumlin and Malloy believe, when women are in a stronger economic position, the country is in a stronger position. Most importantly, it is socially the right thing to do. The governors believe that no Americans working forty hours or more a week deserve to live in poverty. According to Leonard’s findings, however, this reason does not hold true, as minimum wage spikes have minimal effects on the poverty levels. Shumlin and Malloy’s reasoning, however, does hold some economic value for achieving the goals of raising the minimum wage. Employers can reduce the hours these full-time employees work, enabling these workers to earn the equivalent income while providing them more leisure time, in which the employees can pursue other equity opportunities (i. e. investing) (Shumlin & Malloy, 2014). There is, however, opposition to raising the minimum wage, as the next section will highlight. Arguments against Raising the Minimum Wage. Although socially it makes sense to raise the minimum wage, economic implications suggest that raising the minimum will have negative effects on the welfare of the country. First, the costs associated with raising the minimum wage put a significant burden on employers, cutting into the profitability of firms. Therefore, employers will be more reluctant to hire labor, which will lead to an increase in unemployment. This is especially troubling during times of high unemployment when employers’ reluctance to hire young and low skill workers will have significantly negative effects on unemployment (Hassett, 2013). A spike in minimum wages has also proved to lead to higher costs of living. With higher costs of living, the effects of minimum wage will be offset, making overall economic growth stagnant. This was exemplified in Washington in 1998 when state legislators passed a bill that raised minimum wage to $9. 32 (Linksey & Hunter, 2014). Most importantly, as Leonard and other economists have found, the use of raising the minimum wage is a blunt instrument for redistributing income and the reducing overall poverty level for adults (Leonard). Moreover, alleviating economic theory through minimum wage is a weakening influence on employers, which will eventually pass the burden to employers, ultimately placing both employers and employees alike in a worse situation (Hassett, 2013). Therefore, the accompanying reform bills associated with the new proposed legislation in Massachusetts will have minimal impact on lessening the burden on employers, thus leading to the aforementioned effects and the subsequent current resistance from Massachusetts employers. Conclusion The debate over minimum wage standards has been and will continue to be a heavily debated topic for generations to come. The Massachusetts proposed legislation, though beneficial from a social standpoint, is yet only another Band-Aid on the bigger issue of class discrepancy. The Massachusetts legislation will most likely pass, as it is a state historically (and still is) dominated by liberals. The arguments, however, both for and against the minimum wage standards both have their strengths and weaknesses from an economic standpoint. The harsh reality, however, is markets regulate themselves in the long-run and are thus volatile, leading to a volatile economy. Therefore, what legislation works today most likely will be outdated in five years. In essence, liberals can bleed their hearts all over America while conservatives can try beat their ideology into people’s heads, but at the end of the day, the market is the real determinant of a market-clearing minimum wage. References (APA Format) Hassett, K. (2013, March 13). Why we shouldn't raise the minimum wage. Los Angeles Times . Retrieved from http://articles. latimes. com/2013/mar/10/opinion/la-oe-hassett-the-case-against-the-minimum-wage-20130310 Leonard, T. (n. d. ). The very idea of applying economics: The modern minimum-wage controversy and its antecedents. Informally published manuscript, Princeton Department of Economics, Princeton University, Princeton, NJ, Retrieved from https://www. princeton. edu/~tleonard/papers/minimum_wage. pdf Linksey, A. , & Hunter, K. (2014, March 17). Chance of wage rise so remote lobbyists pay little heed. Bloomberg. Retrieved from http://www. bloomberg. com/news/2014-03-17/chance-of-wage-rise-so-remote-lobbyists-pay-little-heed. html Miller, J. (2014, March 13). Deleo proposes raising minimum wage to $10. 50, brightening prospects of a boost. The Boston Globe. Retrieved from http://www. boston. com/politicalintelligence/2014/03/13/mass-speaker-deleo-proposes-raising-minimum-wage-presses-for-unemployment-insurance-reform/pwTcr3oJHC2hQJyKxyZ9cP/story. html Shumlin, P. , & Malloy, D. (2014, March 5). No brainer: Three reasons why a $10. 10 minimum wage is good for america. CNN News. Retrieved from http://www. cnn. com/2014/03/05/opinion/shumlin-governors-minimum-wage/.