Raising minimum wages actually promotes growth (Meroney, 1995) and will have a positive effect on the economy. The positive effect will come from promoting job growth. This statement was made by U.S. Labor Secretary Robert Reich. Reich recommended that the minimum wage of $4.25 and hour be pushed up to $5.15 an hour over a two-year period. Reich said it has been shown that pushing the minimum wage up, would assist in welfare reform, and lower the number of persons on welfare, by making wages high enough to motivate people to go to work, rather than stay on welfare. And with more people in the job market, with more money to spend, increases would be shown in both gross national product sales and an increase in taxes derived from sales taxes.
Although the anti-minimum wage faction states that raising the minimum wage would put more people out of work, a study in 1992 by Larry Hunter, the chief economist for the Joint Economic Committee, stated that after interviewing restaurant owners regarding the effects of raising minimum wages, it was found that no jobs were lost. The study was done in New Jersey, where the legislature had boosted minimum wage to the highest level in the United States (Meroney, 1995). What happens said Hunter, is that people don t go out and begin firing workers after a rise in minimum wages. You just adjust.
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A negative in adjustment sometimes comes in the form of lowering the number of total hours worked by employees while encouraging the workers to increase the amount of work output in job performance. But overall, the study indicated that lower minimum wages actually encourage more mothers on welfare to stay on welfare. Where minimum wages were the lowest, there were the highest rates in persons on welfare.
Another argument for raising minimum wages comes from the view that higher wages increase purchasing power (Rothstein, 1993). Low wages results in the inability of the U.S. to absorb exports, and a need to sell goods at lower prices in the American market. Low-wage competition from the nations with low wages then puts pressure on the U.S. living standards as domestic manufacturers cut wages and benefits to compete.
Wage growth in developing nations is therefore essential not only for their own welfare but for the welfare of the American workers as well. Because of the current trend in unregulated free trade, if wages are not raised to increase Americans purchasing power, the problem of the inability to absorb exports will be exacerbated. This will cause the international competitive environment based on low wages to act as a permanent brake on income growth in developing nations, which will then deny American exporters consumer markets and growth in income.
An increase in minimum wages, therefore, should be encouraged worldwide, because if workers in other countries are too poor to purchase their own products, then their employers will have no choice but to export to the developed world products that are cheaply priced. Furthermore low wages in foreign countries, contribute to political instability (Rothstein, 1993), in which the U.S. has a stake, in that it is often the U.S. taxpayer that has to bail other countries out of financial dilemmas or increase defence spending to keep the peace in countries that are unstable and a threat to the U.S. because of economic disparity.
It is also argued by Rothstein that although free trade is now a reality with great expectations, the success of Asia and especially South Korea and Taiwan, was achieved through severe trade protection, tight state controls on capital and labour unions, and manipulating exchange rates. Worker salaries were also regulated, but with the intent to allow the workers to buy the products made in the home country to lessen the costs of exporting, with much of the profits staying in-country.
In so-called free trade countries such as the U.S. imports and exports may be shared without penalties or tariffs, but the worker’s salaries are regulated by corporate ownership. Therefore, free trade is a misnomer, in that the major part of manufacturing is regulated not only by the corporation but by government wage policies. Argentina is just now finding out that increased minimum wages, also results in increased tax-collections that could be of major benefit to the poor (Rothstein, 1993).
Since 1991, Argentina has demonstrated the highest level of economic growth in Latin American, averaging almost 9% a year. The International Monetary Fund is now using Argentina as growth and economic model. The only problem with Argentina is that the oppressive and corrupt government has not used the increase in tax collections for enhancing or providing public services, and public unrest is beginning to affect the country s economic and political stability.
Therefore, an increase in the minimum wage, be it in the U.S. or elsewhere must be tied to an increase in public services to be effective.
Mexico is another case in point for the effects of lower minimum wages. Although Mexico has statistically demonstrated an increase in the balance-of-trade statistics, by increasing manufacturing with the products final destination as the U.S., what good is exportation, if in return the Mexicans cannot buy U.S. products. A continued lower minimum wage in the U.S. will affect the balance of trade elsewhere, and currently, such heartening statistics as is demonstrated in Mexico is only a `shell game with disastrous results which are sure to occur in the near future. It is higher minimum wages and labour standards that are the engine of both domestic and foreign growth. Higher minimum wages also assists in relieving pressure on American manufacturers to reduce wages at home by supplementing external export markets.
Many people forget that historically the legislation that created minimum wages of 25 cents an hour (Anderson, 1988) in 1938, was to inhibit the flight of workers from low wages in the South to higher paying states in New England. The flight of workers from the South to New England was causing a drain in manufacturing capabilities in the South, and an exploitation of the workers in the North through the lowering of wages. The resulting competitive spiral would have set off another Great Depression just as devastating as the one experienced in 1929. The resulting minimum wage passed by Congress, was also tied to the Fair Labor Standards, which stated that real economic growth could not proceed unless workers had adequate purchasing power to consume the goods they produced, and that a minimum wage was needed to assure minimally adequate purchasing power for economic prosperity. Such observations made in 1938, which was applied to interstate markets and workers in the U.S. are still valid, but the validation for increasing the minimum wage now applies to the global economy, as borders and frontiers have been breached and opened to world markets.
In a short-sighted economic philosophy of American manufacturers flight to Mexico to create `macheadoras using cheap labour, the American manufacturer is then setting up a situation where more American workers will become unemployed, and less able to buy American products, which is the end destination of the `macheadoras products.
With fewer Americans employed, fewer products will be bought, more Americans will have to go on either welfare of some type of assistance program, which means that other manufacturers will have to pay higher taxes, and possibly higher import duties on foreign products, causing further lowering of wages. Therefore, not increasing the minimum wage over time, will have disastrous effects in the U.S. and worldwide. Although it appears that many people, especially in fast food and service jobs receive the minimum wage, a Washington-based study group, the Economic Policy Institute, noted that only 2.4% of the workforce in Indiana earns minimum wage. Only another 7.9% is paid $4.25 to $4.99 an hour.
The usual entry-level in Indiana is $6 an hour. The reason for such so-called high wages is that the job market is tight, and if employees don t pay higher wages in starting salaries, the workers will go elsewhere to work (Shankle, 1995). Therefore, the reverse effect appears to be that if employers continue to pay low wages, then skilled workers or entry-level workers with the ability to move will go to other areas where higher wages are paid. Higher minimum wages appear to guarantee a stable labour pool for the employer.
Although some textbooks often teach that increasing the minimum wage leads to greater unemployment among workers with low skills, recent studies and interviews have not born this out to be as once factual as first thought (Zycher, 1995).
Both sides of the databases for and against raising minimal wages appears to be flawed, in that in the study of labour it is the number of work hours, and the expected productivity of the given workers, that makes a difference if wages rise by decree. Such productivity, at face value, appears to be detrimental to the worker. However, such expectations create a more highly skilled worker that can then seek employment with both higher wages, based on practised skill. For example, a person that starts at a higher minimum wage, will stay in a job longer, increase his or her skill on the job, and instead of moving from job to job at the same pay level, will be able to rise to more supervisory positions, that pay more and that provide more compensatory benefits such as health care. Skipping from job to job, in the view of a prospective employer, does not engender confidence in paying a worker higher starting wages, as training for new employees if often costly. Low entry-level employees hired at subsistence minimum wage, also do not have the opportunity, due to lack of funds to increase his or her education, nor are they provided with fringe benefits and compensation packages.
Compensation packages have slowly crept upward from 1929 when mandated benefits were first enacted. In 1929, only 0.6% of employees had mandated benefits, and by 1989, mandated benefits still only covered about 8.7% of the working population employed by private employers (Gruber and Kruger, 1990).
In studies of the reasons for such a slow rise in mandated benefits, especially for entry-level workers, it appears employers cannot simultaneously accommodate entry-level workers in a way that serve the workers long-term interests. The reason being that mandated benefits, accompanying mandated rises in the minimum wage, will crowd the job market out for entry-level workers that desperately need on-the-job-training, in favour of older, more skilled workers. Therefore, although an increase in the minimum wage should be enacted, it should not be followed with or tied to mandated benefits, as such a marriage would defeat the whole purpose of raising the minimum wage.
Anderson, L. (1988). The minimum wage. NY: Grolier s Multimedia Encyclopedia, Inc.
Gruber, J, & Krueger, A.B. (1990-December). The incidence of mandated employer-provided insurance: Lessons from Worker s Compensation Insurance. National Bureau of Economic Research Working Paper No. 3557, Cambridge: NBER.
Meroney, J. (1995-February). Dems push hike in the minimum wage (51) Human Events, pp. 4
Rothstein, R.(1993-September) Without higher wages, free trade doesn’t pay. New Perspectives Quarterly, (10), pp. 42.
Shankle, G. (1995-February). Minimum-wage raise might nudge other wages higher. Indianapolis Business Journal, (15), pp. 13.
Zycher, B. (1995-June). Minimal evidence. Reason (27), pp. 44.
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