Wednesday, 6 January 2016

Pros & Cons #4: The Minimum Wage

The Minimum Wage is something that has often been a focal point of the left vs right debate over economics and the government's role in managing its economy.

So let's have a look at both sides: both at those who say the minimum wage is an unnecessary, harmful form of government interference, and those who say it is necessary for the welfare of the working citizens of developed nations.

PRO: Worker Protection

Arguably the most significant reason for the existence of a minimum wage is the fact that it can prevent the abuse of workers desperate for employment by lean, restrictive employers. People desperate for a job can often be manipulated by employers into jobs in which the employee is strongly underpaid, often resulting in these people falling into poverty despite being employed. The minimum wage seeks to prevent such people falling into poverty, by giving them a wage that is calculated every few years to be supposedly enough to cover living costs for an individual and perhaps one or two dependents.

A study done by David Neumark and William Wascher of the American National Bureau for Economic Research (NBER) concludes that "over a one to two year period, minimum wages increase... the probability that poor families escape poverty" due to the increase in household income post-implementation of the minimum wage.

A higher minimum wage could reduce the need of
food banks like this.
Not only does escaping poverty help those fortunate enough to climb out, though. According to The Centre for American Progress, raising the minimum wage from $7.25 to $10.10 would reduce money spent on federal food stamps by $4.6bn a year, lifting off a great debt on the government.

CON: Shrinking Wages

However, Neumark and Wascher are careful to explain that their findings suggest separate stories for the poorest in society (who will benefit) and the rest- notably those just above the poverty line, who they claim would be harmed by a minimum wage.
An argument exists that the minimum wage could create a 'vortex' effect around the poverty line- while sucking the poorer up to and perhaps over the poverty line, it could simultaneously pull down those above the poverty line.

One could argue that despite the 'spirit' of the minimum wage, that is to raise the living standards of the poor, it could conversely provide a benchmark of acceptable pay for people who should be earning more. A company may reduce the pay it gives to employees to the minimum wage, reducing the income of those perhaps just above the poverty line and according to Neumark and Wascher, perhaps even dropping them below.

PRO: Productivity

Prominent psychologist Ivan Robertson summed this up very simply: "Improved psychological well-being (PWB) leads to a more productive and successful workplace". The link between income and this psychological well-being is further explored in a study by Princeton economists Daniel Kahneman and Angus Deaton- they conclude that, up to an income of $75k, "emotional wellbeing rises with log income". This means that, to an extent, money does often buy happiness- particularly when we're talking about those on the minimum wage, a figure far less that $75k.

Combining the two conclusions of Robertson, Kahneman and Deaton, it appears that the minimum wage's effect of increasing the wages and thus living standards of those below it can indeed have the effect of increasing productivity in the workplace. Wage is ultimately a great contributor to job satisfaction- and the higher the job satisfaction, the higher the likelihood of an employee being enthusiastic in their work, being present when needed and ultimately being more loyal to the employer.

(?): Lost Jobs

The reason why there's a question mark on this one is because this is perhaps one of the most contentious points in the whole minimum wage debate.

Some argue a minimum wage forces businesses to spend more on staff, meaning many will have to reduce staff numbers to keep the wage expenditure from increasing too much. This means fewer jobs, and consequently higher unemployment.
Their historically low pay has left fast food workers
among the most sensitive to any minimum wage regulation.

According to the American Enterprise Institute, this was the case in Seattle in the first half of this year- during which an increase in the minimum wage to $11 was said by many to have been responsible for the post-recession record loss of 1,300 restaurant jobs in the area. Author of the report Mark Perry highlights in particular how 1,000 of these jobs were lost in May alone, following the minimum wage increase in April- "the largest one month job decline since a 1300 drop in January 2009, during the Great Recession".

On the other hand, there is much evidence to suggest the minimum wage has little impact on unemployment levels generally. A famous study by David Card and Alan Krueger from 1990 compared restaurant employment in neighbouring states New Jersey (where the minimum wage was set to rise) and Pennsylvania (where the minimum wage was unmoved). "We find no evidence that the rise in New Jersey's minimum wage reduced employment at fast-food restaurants in the state", the study concluded.

A study in the British Journal of Industrial Relations set out to test the results found by Card and Krueger in 2009, and concluded the same- that they saw "little or no evidence of a negative association between minimum wages and employment".

CON: Price Inflation

Card and Krueger's findings that minimum wages had little effect on employment, however, did not absolve the minimum wage of any negative impact. In fact, upon investigation they concluded that "much of the burden of the minimum-wage rise was passed on to consumers", when restaurants would increase their prices to compensate for higher wage spending.

The idea of price inflation following minimum wage implementation arguably discredits the notion that the minimum wage causes unemployment. Theoretically, it would seem more likely for a restaurant to not risk all the potential issues that come with a shortage of staff, but instead retain staff (on the new minimum wage or above) and instead make the customers pay for the new burden.

Many businesses have laid the blame for price increases on minimum wage increases. One high profile example was Mexican food chain Chipotle, who, following a minimum wage increase in San Francisco, raised the price of their menu on average by 10%. Here in the UK, following the announcement of a new 'living wage' of £7.20 last month, Whitbread (the group including brands such as Costa Coffee and Premier Inn) announced they would be raising prices as a result of the supposedly "substantial cost increase" of operating as a business under the new minimum wage.

One could argue that such price inflations are simply selfish acts of protest by these businesses against minimum wage regulations that increase their expenses. It probably often is the case- but whether it is a selfish or 'necessary for survival' move, either way prices do increase for us as consumers.

Franklin D. Roosevelt championed the minimum
wage in an economically struggling USA.
PRO: Economic Stimulation

The minimum wage could have positive effects for the national economy, firstly in the form of stimulating consumer spending. A study by the Chicago Federal Reserve Bank examined 23 years of household spending statistics, concluding that for every dollar the minimum wage increased, the average worker received an extra $2800 for consumer spending. The 2009 study noted that spending on cars in particular increased as a result of increasing the minimum wage.

President Franklin Roosevelt was a huge proponent of the minimum wage for this reason- he famously stated "the best customer of American Industry is the well-paid worker", during his push to enact the federal minimum wage in the USA in 1938, during a recession following the Great Depression.

The Minimum Wage- Help or Hindrance? Put your opinions in the comments below! 
Mohammad Lone Editor