Minimum Wage - Debate Over Consequences

Debate Over Consequences

Various groups have great ideological, political, financial, and emotional investments in issues surrounding minimum wage laws. For example, agencies that administer the laws have a vested interest in showing that "their" laws do not create unemployment, as do labour unions, whose members' jobs are protected by minimum wage laws. On the other side of the issue, low-wage employers such as restaurants finance the Employment Policies Institute, which has released numerous studies opposing the minimum wage. The presence of these powerful groups and factors means that the debate on the issue is not always based on dispassionate analysis. Additionally, it is extraordinarily difficult to separate the effects of minimum wage from all the other variables that affect employment.

The following table summarizes the arguments made by those for and against minimum wage laws:

Arguments in favour of Minimum Wage Laws

Supporters of the minimum wage claim it has these effects:

  • Increases the standard of living for the poorest and most vulnerable class in society and raises average.
  • Motivates and encourages employees to work harder
  • Stimulates consumption, by putting more money in the hands of low-income people who spend their entire paychecks.
  • Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees.
  • Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid.
  • Encourages people to join the workforce rather than pursuing money through illegal means, e.g., selling illegal drugs
  • Encourages efficiency and automation of industry.
  • Removes low paying jobs, forcing workers to train for, and move to, higher paying jobs.
  • Increases technological development. Costly technology that increases business efficiency is more appealing as the price of labour increases.
Arguments against Minimum Wage Laws

Opponents of the minimum wage claim it has these effects:

  • As a labor market analogue of political-economic protectionism, it excludes low cost competitors from labor markets and hampers firms in reducing wage costs during trade downturns. This generates various industrial-economic inefficiencies.
  • Hurts small business more than large business.
  • Reduces quantity demanded of workers, either through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs.
  • May cause price inflation as businesses try to compensate by raising the prices of the goods being sold.
  • Benefits some workers at the expense of the poorest and least productive.
  • Can result in the exclusion of certain groups from the labor force.
  • Small firms with limited payroll budgets cannot offer their most valuable employees fair and attractive wages above unskilled workers paid the artificially high minimum, and see a rising hurdle-cost of adding workers.
  • Is less effective than other methods (e.g. the Earned Income Tax Credit) at reducing poverty, and is more damaging to businesses than those other methods.
  • Discourages further education among the poor by enticing people to enter the job market.
  • Discriminates against, through pricing out, less qualified workers (including newcomers to the labor market, e.g. young workers) by keeping them from accumulating work experience and qualifications, hence potentially graduating to higher wages later. (This may be a reason why trade unions press for minimum wages, i.e. to protect older workers on the job from the competition of younger, cheaper workers on the job market, for a given level of productivity.)

In 2006, the International Labour Organization (ILO) argued that the minimum wage could not be directly linked to unemployment in countries that have suffered job losses. In April 2010, the Organisation for Economic Co-operation and Development (OECD) released a report arguing that countries could alleviate teen unemployment by "lowering the cost of employing low-skilled youth" through a sub-minimum training wage. A study of U.S. states showed that businesses' annual and average payrolls grow faster and employment grew at a faster rate in states with a minimum wage. The study showed a correlation, but did not claim to prove causation.

Although strongly opposed by both the business community and the Conservative Party when introduced in 1999, the minimum wage introduced in the UK is no longer controversial and the Conservatives reversed their opposition in 2000. A review of its effects found no discernible impact on employment levels. However, prices in the minimum wage sector were found to have risen significantly faster than prices in non-minimum wage sectors, most notably in the four years following the implementation of the minimum wage.

Since the introduction of a national minimum wage in the UK in 1999, its effects on employment were subject to extensive research and observation by the Low Pay Commission. The Low Pay Commission found that, rather than make employees redundant, employers have reduced their rate of hiring, reduced staff hours, increased prices, and have found ways to cause current workers to be more productive (especially service companies). Neither trade unions nor employer organizations contest the minimum wage, although the latter had especially done so heavily until 1999.

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