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Minimum Wage

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Louis-Philippe Frenette Blais
Daniel Drugge
Political Economy
October 6 2013

News article: http://www.nytimes.com/2013/02/13/us/politics/obama-pushes-for-increase-in-federal-minimum-wage.html?pagewanted=all&_r=0

American workers will have a 1.75$ increase in their hourly wage by the end of 2015, as President Barack Obama recently called to raise the federal minimum wage from $7.25 an hour $9.00 an hour. This increase in the minimum wage of American citizen aims to help people with a low annual wage: cooks, employees of the janitorial industry and many others working these necessary menial occupations are set to benefit. The white house estimates that this measure will boost the wage of approximately 15 millions low-income workers.

Raising the minimum wage, according to the White House press, will have some positive effect for low-income families; however, many companies are opposed to raising the minimum wage. A higher wage will have a direct impact on the cost of business. Some economists argue that higher minimum wage will result in an increased unemployment percentage. Although minimum wage laws can fix hourly pay, they cannot guarantee jobs. Employers are not willing to pay a worker more than the value of the additional product that he produces. For example, if a worker produces 4$ worth of goods per hour and because of the minimum wage he has to be paid 5.15$. Since he cost more than what he produces it makes it hard for him to find a job. At one point in the article, the President said that one of the best ways to get the economy going again is to put money in the pockets of people who work. (Lowrey)It is true that families with low income will earn more money: it is projected that a family that is earning $20,000 to $30,000 a year will see an additional $3,500 in their income. (Lowrey) This general positive outcome of increasing the minimum wage has led many law makers to wrongly assume that increasing the minimum wage is an effective way to fight poverty. From the point of view of an economist, raising the minimum wage may increases the probability that a poor family will escape poverty through higher wages, but it does increase the probability of another family with average income will become poor as a result of minimum wage giving rise to inflation. It also decreases the proportion of families with income near the poverty line, suggesting that it more will be more difficult to escape poverty. We all know that if the minimum wage increases then the cost of living will inevitably increase as well as a result of inflation.

Economists are against minimum wage laws because they create a price floor. In this case, a price floor is not the price that products can be sold for, but what price employers can spend on their employees. For non-economists, legislating a minimum wage is commonly seen as an effective way of giving raises to low-wage workers. Unfortunately it, like any other price floor, creates a surplus. In this case, the surplus is a larger than expected number of workers more of are willing to work in minimum-wage jobs than there are employers willing to hire at that wage. Economists think that there should not be any policies concerning wages: an employee should be paid what the employer thinks he/she deserves. Minimum wage increases make unskilled workers more expensive and therefore undesirable relative to all other factors of production. (Mankiw) For example, if skilled workers make 15$/hour and unskilled workers make three dollars an hour, skilled workers are five times as expensive as the unskilled. Imposing a minimum wage of five dollars an hour makes skilled workers relatively more attractive by making them only three times as expensive as unskilled workers.

Another important characteristic of the policy to increase minimum wage that was not discussing in the article is that it may also negatively impact workers by changing how they are compensated. Benefits such as paid vacation, free room and board; inexpensive insurance and subsidized childcare are an important part of the total compensation for many low wageworkers. (Mankiw) When minimum wages rise, employers can control total compensation costs by cutting benefits; such is the case for the United States today. The employer always had to follow the minimum wage in order to pay their employee. The minimum wage should not be existent nowadays; the employer should have the choice to pay their employee based on their knowledge. An employee that knows more and produces more should have an higher hourly range.

Sources:
Textbook
Mankiw, N. Gregory. Principles of Economics. 6th. Mason, OH, USA: 2012. Print. Website:
Lowrey, Annie. "Raising Minimum Wage Would Ease Income Gap but Carries Political Risks." New York Times. N.p., 13-02-2013. Web. 5 Oct 2013. .

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