Minimum wage Essay Example for Free

Minimum wage Essay While poverty continues to increase in several areas of the world, economist tries their best to find a way to offer a feasible solution. One of the most common answers that can ordinarily be found in economical debate would be the issue of the establishment of a minimum wage. Setting a minimum wage is a policy tool that ought to increase the income of the working class in a certain community or country. Seemingly this premise gives the minimum wage policy easy to understand. Ideally, an increase in the minimum wage results to an increase in income that is suppose to alleviate low income households into a higher social status. In fact, this policy tool has been commonly used to alleviate poverty levels in the third world countries. Most regions in the Latin America adopted this policy sometime in their past. Nonetheless its positive and negative effects are still subject to careful analysis and thoughtful criticism. This paper would focus on the effect of an increase in minimum wage on different countries primarily between a first world and a third world country. In doing so, the paper would attempt to review the literature presented by Gindling and Terrell (2007) along with the data’s gathered by Powers. From such literature I have gathered the importance or the role of unemployment rate on the changes in poverty level. The several discussions shall be related to the surveys, theoretical models and data’s that are gathered as of June 2007. The econometric analysis that would be use would also be based on the regression that was formerly made by Powers. Literature Review From the different articles that flooded the economic circle, there were several debates that concerned the utility that could be derived with the implementation of minimum wage. The proponents of the positive impacts of an increase of the minimum wage in reducing low income household according to the study made by Gindling and Terrell believes that it would only be effective and limited in the formal sector. Those who compose this â€Å"formal sector† are the employees who receive more than or equal to the minimum wage. Those people that argue against the minimum wage does so under the assumption that the market and economy today is highly affected by a close competition brought about by globalization. In line with this, the current governments would be required to create the most attractive business milieu for the investors. Thus, the government, most especially of the â€Å"developing country† would most likely impose lower minimum wages or might even argue to abolish it (Lee, 2002). In a brief discussion, a minimum wage implies a law that was legislated in order to ensure that worker/s will receive a minimum amount of payment for a certain amount of performance made. This law was created in able to protect the workers, most especially those who low income earners from possible exploitation and abuse from their employers. Most of the low wage earners were composed of unskilled laborers and have mostly received low level of proper education, if any. At the same time, insuring that this type of workers will receive a minimum wage would result to a lower level of poverty. This will be the case since it is standard that upon setting the minimum wage factors such as the daily living standards of a person and the purchasing power are taken into consideration. Such procedures would make a minimum wage law more effective and beneficial for the worker/s. Gindling and Terrell in their study of the situation of the economy of Honduras provided insights regarding the different factors that may affect the family income. The first thing that they believed that one should consider in instituting a minimum wage would be the person/s that the policy will apply. The person/s involved and the labor market in which they belong are important in the considerations since the more competitive a market is, the higher the unemployment rate it will produce. It is important to note because the demand for labor usually determine the number of person that shall be displaced upon the possible increase in the minimum wage. The second factor would be on the possible effect of the minimum wage changes on the workers that are not cover with the implementation of such policy. This is important to note since those people who would lose their job because of the increase in minimum change increases the available supply of labor in the sector that was not covered by minimum change. Such sector includes self-employed individuals or individuals who are underpaid. Factors Affecting Minimum Wage  Another factor that Gindling and Terrell believe to create an impact on the family income is the social status in which the family belongs. The increase in minimum wage is meant to reduce poverty. Nonetheless, the families that might have been affected by the changes in minimum wage might not be included in the families along or under the poverty line. This is an important factor since it would determine if the increase in minimum wage would have an impact on the middle class or the lower class. If the minimum wage increase would affect only or greatly on the middle class, the gap between the middle and the lower class would inevitably widen. The last thing to consider would be the view that a society takes regarding what a minimum wage shall cover. In some cases the minimum wage is based on the worker family’s basic need. In other society the worker’s personal basic needs is the one which is considered. Thus, in effect, it would be relevant to consider the number of the working member in the family or the number/s of bread winner/s. Effects of Minimum Wage The effects of a minimum wage depend upon the household and the family that responds to the requirements of the labor market. A family might be able to benefit in an increase of minimum wage if there are two or more members of that family that are would receive or affected by the increase in minimum wage. Nonetheless, if instead of gaining from the minimum wage increase, some earners in the family was removed from the job resulting from the laying off of workers that company resulted into, to be able to effectively provide other workers with a minimum wage without decreasing the company income. The family would suffer more poverty than they have experienced before. The effects of minimum wage also differ with respect to gender, age and ethnicity. More often than not women due to their high expense, having more leaves and being more prone to illness due to a â€Å"weaker body structure† are more susceptible than man when lay offs occur. Thus, for those families that are single handedly supported by a female, an increase in minimum wage is not actually good news. Also, people who are already approaching their golden age or those who are closing to retirement age are usually subjected to layoffs since they are considered to be less productive than the young ones. Lastly, there are areas were ethnic discrimination is still an issue. Problems with Minimum Wage According to the research made by Gindling and Freeman, the main objective of creating a minimum wage is not to decrease the number of employment; it is actually to equally distribute income to the low wage earners. The cost cutting procedure that usually resulted as an effect of the increase in minimum wage cost the job of the workers more prominently those who are in the bottom ladder of production. Since these people do not have enough skills, experience and education, they would find it very hard to look for a new job. In such case, instead of alleviating poverty, the increase in minimum wage results to an increase in poverty. In the view of Richard Berman, the government upon imposing the law on minimum wage increase imposes such command to the employers on how much they should give. However, the government does not have the authority to command the employers regarding who are the people that should and should not be hired. Such situation is what causes the employers to layoff the less productive workers. It also made them employ less people and employ only those who posses more than enough qualification that would fit for the job and for the wage. The drastic effect that such situation results into is a little bit complicated. First and foremost the amount of available employment would be greatly reduced. With lesser opportunity for those who does not have jobs and with an additional number of unemployed produced from the layoffs, unemployment would greatly increase. In the long run the family of those who are unemployed would suffer lower income and would fall under or stay under the poverty line. Another effect would be on how employers would choose their employees. Since employees cause more, aside from a reduction in the number of employees, as explained above, employers would also tend to increase their qualifications for possible employees. Thus, employers would tend to hire people who are better qualified, that is that they have attained higher level of education and/or skilled. Those who includes in the highly educated employees are usually compose of the younger generations. Also, one cannot expect someone below the poverty line to get the best education available since it is most like that higher education is expensive. The skilled laborers on the other hand are only a few and would more or less attain some degree of education. This leaves the adult unskilled worker/s less preferable for a usual low wage job. With this in mind, one could assume that the probability of unskilled adults to work on jobs that would be affected by the increase in minimum wage, very low. It is more likely that would seek and settle to an underpaid job to be able to somehow support themselves and their family or they might not work at all. What may follow is a further increase in poverty, rather than a reduction. Another possible scenario involves chances of higher prices in commodities. As a usual flow in economics, the expenses that were received by the company would be passing on to their consumers in able to maximize profit. Sometimes this kind of reaction may lead to a lower quality in the services and the products produced by the company. Further more, the employers might ask the employees to work for much longer hours and workers might be subjected to a low quality of working environment with additional task. Minimum Wage and Poverty in the United States According to Gindling and Terrell (2007), using the study that was conducted by Blackburn and Addison in 1999, an increase in the minimum wage had a positive effect on the level of junior high school dropouts from 1983 to 1996. This can somehow be interpreted that less junior high school and teenagers stop from schooling in able to help their parents earn family income or that there have been more students who are able to continue going to school. Neumark and Wascher in 2002 conduct a study through the use of US CPS data. Their research demonstrates that an increase in the minimum wage both have a positive effect on the probability of families to fall into poverty and to escape poverty. The impact of the Neumark and Wascher study is that there is a redistribution of income among the poor.