In general definition, minimum wage is the minimum amount of compensation that laborers must receive under the law and is regarded as the lowest wage employers are allowed to pay. Though a federal minimum wage is set in the US, individual states are still allowed to choose to make their own laws on this. In public economics, it is often treated as a measure to address problems associated with poverty by making sure all workers will be able to enjoy a minimum level of income to support their living standards. Despite this, many economists see it as ineffective and inefficient. Here are the advantages and disadvantages of minimum wage:
List of Advantages of Minimum Wage
1. It can be helpful depending on the type of market.
The effectiveness of minimum wage actually depends on the type of market it is imposed on. Specifically, it can be beneficial to workers and a monopsony market if it can secure a higher minimum wage and employment level. Also, drawbacks of wage rigidity can be solved by assessing the minimum wage level more often, though this would involve other costs of transactions when policy-makers re-adjust wage levels too often. Moreover, minimum wage is also observed to help with reducing labor turnover and improving organizational efficiency, considering that there is just a slight increase in labor costs and no significant changes in unemployment rate.
2. It can help with reducing tax burden.
People who are making the minimum wage are not using public services as many as those who are unemployed would. As you can see, unemployed people are given welfare, food stamps and rent assistance. Thus, having as many people as possible on minimum wage would lower the need for public assistance, which will reduce the tax burden on communities and the state.
3. It can help certain families.
Considering that a significant number of minimum wage earners in the US are working parents and are raising a family, these people would be forced to work for less money without imposing a minimum wage.
4. It can help with setting small business budgets.
By being unable to set a minimum wage, small businesses will find it difficult to budget their money. On the other hand, a minimum wage policy will let them know what is expected to pay each hour and will allow for creating new jobs within their organizations based upon the budgeting information.
5. It serves as an employment incentive.
A minimum wage will provide the unemployed an incentive to take a job opportunity, as they would know how much their minimum pay would be. Unemployed individuals will then have the opportunity to compare the money they would get from public assistance to the minimum wage to determine the perks of taking the job.
6. It is a common reference when hiring.
Putting a minimum wage policy will make the hiring process for employers easier for skilled and young workers, who would know upfront what kind of salary they can expect. Plus, employers will not have to go through the challenging process of negotiating salaries with new employees.
List of Disadvantages of Minimum Wage
1. It can disrupt the economic system.
Considering the demand and supply where the economy is at equilibrium, minimum wage functions similarly to a price floor. Imposing a higher wage level than the equilibrium would disrupt the price mechanism, which means that the market will not be able to clear, seeing workers not being able to find work. As a result, non-price competition, such as worker’s personal connection, experience or age, would supersede the price competition, which makes it more difficult for unskilled and younger individuals to find work. This just means that a minimum wage policy will have side effects that can cause a lot of damage to the labor market.
2. It can hurt the poor.
Proponents of increasing minimum wage often say that it is difficult to support a family with the only breadwinner earning such minimum salary. However, for a minimum wage increase to help such an individual earn money for his or her family, he must have a job and try to increase it. Also, increases in the minimum wage will actually redistribute income among poor families, where some are given higher wages and others are put out of work.
3. It can create unemployment.
In a free labor market, salary rates would reflect the willingness of employers to hire them and the willingness of workers to work. As you can see, individual productivity is the primary determinant of what employers are willing to pay, and most of the people who are working are not directly affected by minimum wage, as their productivity, as well as pay, are already well above it. Now, because legislated increases in labor costs do not increase worker productivity, some laborers would lose their jobs, especially those who are the least productive.
4. It does not offer personal-growth opportunities.
Most people who are working on low wages are usually those who do not have fully developed skill sets. However, they also need to work to support their needs, especially when they have families to take care of, leaving them no choice but to work even for a minimum fee. What’s worse, some of them are being tasked to perform labor-intensive work and do not have much of an opportunity to develop their skills to get a better job. Sad to say, there are employers who would not spend for training, knowing that they can hire people who can perform specified tasks without it.
5. It reduces other job benefits.
Even with an increase of minimum wage, it would not secure low-wage earners from not being able to find work, as employers respond to forced higher wages by adjusting other components of compensation, like health benefits. Aside from this, employers have found other means of adjusting their expenses, like stopping on-the-job training.
Given the facts, it would seem that minimum wage can be helpful to some people, but is not that beneficial to others. However, the reality is not quite as “cut and dry” as it shows, and there is definitely a tightrope between the advantages and disadvantages of raising it. Based on the information provided in this article, what do you think?
Keith Miller has over 25 years of experience as a CEO and serial entrepreneur. As an entrepreneur, he has founded several multi-million dollar companies. As a writer, Keith's work has been mentioned in CIO Magazine, Workable, BizTech, and The Charlotte Observer. If you have any questions about the content of this blog post, then please send our content editing team a message here.