Minimum or Living Wage on Unemployment - Essay Example

MINIMUM OR LIVING WAGE ON UNEMPLOYMENT By governments through the department of labour, impose minimum wage. The laws on minimum wage prevent employers from different companies from paying wages below the set level. When the government imposes a high minimum wage, employers are forced to change some of their business strategies to attain the set standards. Some of the adjustments that companies make include reducing hiring, reducing the employees working hours, reducing the benefits accrued to workers such as a free lunch, and charging higher prices on some of the commodities. Setting the minimum wages at a specific level harms employees and the economy. Consequently, minimum wages stifle job vacancies for the minorities, low-skill workers, and the youth. In view of this, the essay classically analyses the impact of a minimum or living wage on unemployment. Background of minimum wage Minimum wage policies originated from Fair Labour Standard Act (FLSA) which was signed by President Franklin Roosevelt in 1938(Waltman 2004, p.141). During that period, the act covered specific areas in production industry, which include transportation, mining, and manufacturing industries. However, as time went by, other sectors of the economy were added such as public schools, laundries, and construction industry. Currently, the act covers over 85 percent of the labour force. Thus, the state requires employers to comply with the minimum wages set by the state. Minimum wage policies affect the overall economy. Employers are forced to change their living standards to ensure that they accommodate the increase in the minimum wage. Who are paid the minimum wage? Although the government has set a specific level of minimum wage payment, there is only a specific group that is affected by the law. Most employees who get the minimum wage are part-time workers, young workers, and people from poor families. Companies employ people are highly skilled and can perform different tasks at the same time. As a result, some of the workers have lost employment as a result of specialization or lacking the skills that are required in a company. Most employers employ the experienced workers living out the young people who are inexperienced. Thus, most young people are unemployed who paid minimum wages in their areas of work (Waltman 2008, p. 152). A research done by the Bureau of Labour Statistics shows that, 1.8 million employees are paid minimum wages. 49 percent of 1.8 million are the young adult aged 24 and under. 51 percent, or about 1.8 million people are over 25 years old (Rutkowski&Scarpetta 2005, p. 2009). They consist of people who live in poor families, those who work on a part-time basis and those who come from poor families. Individuals from poor families lack the skills required in the job market because they do not have access to the required education. Most of them end up looking for jobs to survive. Some of them volunteer in some of the organisation and end up getting minimum wages. Families who are still below the poverty level cannot attain high paying jobs because most companies require people who have the expertise required in performing some of the duties in an organisation. Models of minimum wage To gain more understanding of minimum wage, economists have come up with different models to explain the effects of minimum wage on employment. There are three types of models that explain the effects of the minimum wage they include institutional, competitive, and monopsony. The models cover aspects such as the impact of minimum wages on workers, employees and employers, and the changes associated with the change in the minimum wage. The three theories are discussed below: Monopsony Model Monopsony has described by Robinson it is an analogy of the word monopoly. Monopoly refers to a single seller in a market. On the other hand, the monopsony is a single seller who is confronted by many buyers in a market. Thus, the monopolistic market faces an upward sloping supply curve. Monopsony mostly focuses on the labour market. In relation to the labour market, monopsony refers to a situation where a single employer-dominated the market. That means that few employers are available in a specific market. The main market frictions which drive the market include mobility costs on the supply, hiring, turnover and search. Although the different particulars of may differ in the monopsony model, the core components of monopsony models include labour which stand on the upward slope of the curve and employer discretion on wages. Monopsony model assumes that the labour curve faces an upward slope. Monopsony model offers different views on the effects of minimum wage changes. When the minimum wage increases, a monopsony model predicts that the employment hours increase. The rise in employment expands the industry’s output (Manning 2013, p. 16). Change in minimum wages has little effect on the increase or decrease of employment in a monopolistic market. The employer is single, and the demand for employees is low at some point and high sometimes, depending on the needs of the company. However, an increase in wage labours may require the company to increase the labour costs. Thus, some adjustments have to be made to make sure the company obtains the profits that it is supposed to get. Thus, the company may reduce the number of employees to decrease its labour costs. Retrieved from http://www.economicshelp.org/wp-content/uploads/2012/11/monopsony-mw1.jpg Monopsony model The monopsony curve above shows the relationship between the minimum wages and employment aiming relation the marginal revenue product (MRP) and marginal factor costs (MFC). Competitive model In this model, the core components are the wage rate and the labour demand. In a competitive labour market, an imposition of minimum wage creates a negative impression on the marketplace. In the market demand curve, labour is represented by DD, while supply by SS. The intersection between the two determined the employment rate. If there is an increase in labour, there is a reduction in employment that is fewer job opportunities and working hours. When the minimum wage increases, employers are drawn into the market, leading to an increase in labour. If the minimum wage is reduced to Em, the minimum wage will be set at Wm. Although many employees may be drawn into the market, their skills differentiate them (Neumark&Wascher 2008, p. 241). Companies employ employees who have more skills. The competitive model assumes that may respond to the increase in the minimum wage by minimizing other products. Some of the factors include reducing the employment rates and offers given to the employees. Source: The negative effects of minimum wage laws by Mark Wilson Institutional model Institutional also referred to as behavioural model is used to evaluating the minimum wage and its effects on employment. It draws its concepts from the fact that the labour market is institutionally segmented, prone to an excess supply of labour, socially embedded, and imperfectly competitive (Carneiro 2006, p. 146). It is also based on the fact that psycho-social and technological factors in firms. The internal labour market is also determined by productivity and costs. In this model, moderate minimum wage increase may have no employment effects or a small positive effect. Consequently, the expected response of employers to increase in minimum wage is improving service, expanding sales and general economic expansion. The costs from the increase minimum wages are partially offset by improving the productivity and the organisational slack. It is achieved tightening the human resource practices such has enhanced customer services, increasing the performance standards, and increasing the work effort. The institutional model assumes that higher minimum wages lead to ripple effects. The organisation raises the pay of the employees above the minimum wage to motivate them. Minimum wages and Employment Although different economists have come up with different models to give the relationship between the minimum wages and employment, organisation have to adapt to different changes to adapt to the increase in minimum wages. Raising the minimum wages means that, a cost has to be incurred to adapt to the changes. Companies need to come up with strategies to ensure that a rise of the minimum wage does not affect the overall functionality of the business. Apart from the minimum wages, employees have to come up with strategies to make sure that employees have the morale for work. Evidently, rise in minimum wages results in unemployment. Although raise of minimum wages aims at raising living standards, it has advanced effects on the disadvantaged members of the society such as youth, ethnic minorities, lower-skilled workers, and the disabled. Minimum wages mostly affect the teenage labour because they are less skilled and have the least experience. Additionally, teenagers accept minimum wages because they are still under training; thus, the minimum wage is more binding to teenagers than any other group in the world. However, most companies need a workforce that is experienced and can perform different duties. An increase in minimum labour makes it hard for companies to employ less skilled employees. As a result of this, teenagers have lacked employment because they are not experienced and lack the required skills. If minimum wage is imposed above the market wage, the employment rate reduces (Burgess & Garrett 2005, p. 8). According to U.S.A Department of labour research, showed that an increase in minimum wage in 1938 resulted in the loss of a job for 40,000 to 50,000 which represented 13 percent of the total employees. The workers who lost employment earned below the wage labour. An increase in the minimum wage had adverse effects on employment opportunities (Levin 2005, p. 47). Low-skilled labourers were not absorbed in the market because of the increase in the wage labour. Businesses had to take drastic steps to ensure that they accommodate the large number of employees and ensure that the minimum wage law is followed. The research showed that an increase in minimum labours results in reduces in a decrease of employment of the teenage by three percent. There are various adjustments that businesses need to adapt in order to ensure that increase in minimum labour does not affect the operation of the business. Employees have to cut the employee training. As a result, businesses ensure that they only employ workers who have specific skills. Part-time working is also eliminated to reduce the labour costs. In most of the business entities, increase in the minimum wage results in the replacement of lower-skilled workers to high-skilled workers. Thus, a raise minimum wage result in demand for workers who have greater skills. There is also minimization of hours worked and termination of workers who perform poorly. Most economists suggest that firms can respond to increase in the minimum wage by reducing employment. Increase in employment when the minimum wage increase may result in a loss to companies because they require high labour costs. The increase in minimum wages means that companies have to expand the payrolls of the existing employees. Thus, most business entities maintain employees. Thus, it becomes more difficult for employees with less skills and experience to find a job. Raising minimum wage favours those who already have jobs at the expense of the unemployed. Companies do not wish to spend more money on training new employees. It is more economical to maintain the existing employees than taking on new employees who have less skill and require training. In conclusion, the bottom line is that raising minimum wages leads to unemployment as discussed above. The business entities have to make some readjustments to accommodate the rise in minimum wages. The readjustments include maintaining workers and employing the skilled employees to reduce the training cost. Empirical research also shows that an increase in a minimum wage leads to loss of employment thus increasing the unemployment rate. Increasing the minimum wage means that there is an additional cost. Thus, business entities have to look for ways to cater for the cost involved. The low-skilled people and those with less skills pay for it by losing their jobs. Employers will not employees whose labour does not produce more than the cost of hiring. Better policies on the labour market should be implemented to cater for all individuals in the society. Increasing the minimum wage labour means that, someone must pay for the cost involved. As a result, the skilled and less experienced workers are affected. Bibliography Burgess, S., & Garrett, P. 2005. A dynamic approach to Europes unemployment problem: policy report. London, Centre for Economic Policy Research (CEPR). Carneiro, F. G. 2006. The third dimension of labour markets: demand, supply and institutions in Brazil. New York, Nova Science Publ. Levin, O. M. 2005. The political economy of the living wage: a study of four cities. Armonk, NY [u.a.], Sharpe. Manning, A. 2013. Monopsony in Motion Imperfect Competition in Labour Markets.Princeton University Press. Neumark, D., &Wascher, W. L. 2008. Minimum wages. Cambridge, Mass, MIT Press. Rutkowski, J. J., &Scarpetta, S. 2005. Enhancing Job Opportunities Eastern Europe and the Former Soviet Union. Washington, DC, World Bank.  Waltman, J. L. 2004. The case for the living wage. New York, Algora Pub. Waltman, J. L. 2008. Minimum wage policy in Great Britain and the United States. New York, Algora Pub. Read More