January 3, 2006

Minimum Wage Increase - An Analysis of Effects.

In the last post I talked about why increasing the minimum wage should be seriously contemplated. Let us see now what the results will be of such an increase.

The potential positive and negative effects of an increase in the minimum wage are explained nicely here. The most important arguments against an increase can be stated as follows:

1. Reduction in the employment opportunities for the unskilled or low-skilled workers (because many business will lay off these people in favor of workers with higher skills).
2. The harmful effects on the economy as a whole (curbing growth by increasing the cost of the labor).
And assuming the validity of these two disadvantages,
3. it is not really worthwhile risking these deleterious consequences because most people working for minimum wages are not the primary or solitary income earners in their families. In other words, most people are not completely dependent only on their own income.

Let us consider each of these separately.

1. This is, by far, the most important argument against an increase in the minimum wage. But it has been a very controversial issue with contradictory conclusions from various studies by professional economists. On the face of it, though, it seems reasonable to suppose that there will be a drop in employment as a result of an increase of the minimum wage. There are a number of reasons why this reasonable assumption might be misleading.

One reason is that there is evidence to believe that the minimum wages are less than what they could be. As the above mentioned Wikipedia article says, the minimum wage fell about 29% in real terms between 1979 and 2003. In other words, it is viable to increase the pay for the workers within the market requirements. Thus it possible that an increase in the minimum wages would not result in a significant drop in employment.

There have been a number of studies on this subject. It seems a majority of them conclude that the employment indeed drops. But there have been notable exceptions to this analysis. These are explained here. Given this general uncertainty and a lack of consensus among experts, it is reasonable to assume that reduction in employment due to an increase in the minimum wage is not a foregone conclusion.

2. Workers earning minimum wage are unskilled or low-skilled and they mostly work in service industry (74.6%, as is shown by this table). Further, they constitute a very small percentage of the total work force( 2.7%, see this). It is unreasonable, then, to suppose that any event confining only to this tiny part is likely to effect the overall health of the economy.

Apart from that, I shall fall back on my basic moral requirement: any person working full time in a job should get the bare minimum that is necessary for a decent existence. If that comes at the cost of impeding the growth of economy, so be it. We have to work on means to ensure the growth of economy after we meet our more important goals. Growth of the economy is not a virtue in itself, and certainly not at the cost of someone working very hard and still failing to live decently.

3. It is often said that most people working for minimum wages are not the primary or single income earners in their families or that most of them are young and live with parents. There might be some justification to the former, but the later is not correct. According to this data, the percentage of workers earning the minimum wage and who are 25 years or older is 78.1%.

Further, a large number of people working for minimum wage are working in those jobs full time: according to this, the percentage of minimum wage earners who work more than 35 hours a week is 71.1% and the percentage of those working more than 40 hours a week is 64.3%.

Poverty threshold for a family of four is around $17,600 (in 2000). More on this here and here . A person working 40 hours a week throughout the year makes (at the federal rate of $5.15) $10712. If both the parents are working, that would make the family's income $21424. While this is above the poverty line, it is almost impossible for both parents to work everyday, particularly when the children are young. In most cases, one of them might not be able to work at all. (I am not considering here the possibility of various welfare schemes which might make a significant difference.This is important and one needs to study that aspect also).

I must conclude that there is ample justification for an increase in the minimum wage. As I mentioned earlier, this is partly a result of ideology. Still, I believe that there is enough empirical evidence to justify it.


Post a Comment

<< Home

Subscribe to
Posts [Atom]