Economists agree on very little. The Brainstorming rubric presents long standing arguments and asks readers to give their two cents.
Minimum wage is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers.
Like customers buy milk from dairy farmers, employers buy time from workers. And just as customers buy less milk if the price of dairy rises, employers buy less labor if the government sets its price above the employers' willingness to pay through minimum wage legislation.
If this happens on a large scale, many workers will get fired, unemployment will rise and the very people the government wanted to help by increasing wages will lose their jobs.
Studies have showed that minimum wages, if not set too high, do not have an effect on jobs. Some studies find no change in employment, others find a small positive or negative effects, but none finds any serious damage.
Equipped with new technologies, workers are able to produce much more than before. As a result, firms make more profits per workers and can therefore afford to pay higher wages. However, because they have more bargaining power when negotiating with low-income earners, they pay the bare minimum.
Firms have more bargaining power because they suffer less financially by not filing vacancies than workers by being unemployed: firms can ask remaining workers to temporally pitch in when there are vacancies, whereas unemployed workers cannot ask neighbors to pitch in on their monthly bills.
This difference in bargaining power is even more pronounced for the lowest paid workers (i.e. those receiving the minimum wage) or when unemployment insurance payments are low since firms can always find a desperate worker willing to work for next to nothing.
Therefore, even though margins decrease when minimum wages are raised, firms do not fire workers because due to technological improvements revenue per labor remain higher than its cost.
Ability to pass cost to customers
Due to globalization, most low-wage manufacturing jobs have gone to Asia. Nowadays, most minimum wage jobs are the few service jobs that can only be done locally, such as work at restaurants, retail stores or barber shops.
Therefore, when a jurisdiction increases its minimum wage, instead of firing workers every firm passes the higher costs to consumers by raising prices knowing full well that their competitors, who are subject to the same regulation, will do the same. Consequently, prices rise, workers' wages increase but few get fired.
The damage has been done
Minimum wage legislation has already destroyed millions of jobs. Current studies show that raising minimum wages has no effect on unemployment because jobs that were affected by such raises may have already disappeared.
In fact, studies done in the early 1980, before firms started to outsource jobs to Asia, showed a small increase in unemployment with increases in the minimum wage.
Since then in the United States, the number of manufacturing jobs, where wages could not adjust downward to match Asia's due to minimum wage legislation, have fallen from a high of 19 million (22% of non-farm payroll) in 1977 to around 12,000 (9% of non-farm payroll) today.
Finally, for better or for worst, minimum wage legislation caused firms to invest more heavily in technology because for some tasks, it made buying a machine cheaper than hiring an extra employee at the higher legislated rate. In the long run, this further reduced the number of available jobs as machines were replaced by people.
Why do you think that unemployment rates do not rise when the minimum wage increases?
By Kasole Nyembo