The Federal Minimum Wage Law In America Economics Essay

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The federal minimum wage law in America was instituted in1938 as part of the Fair Labor Standards Act. It set the minimum wage at .25/hour. It was a depression era landmark that ended child labor. In his June 24, 1938 "fireside" chat to the nation, president Franklin Delano Roosevelt said, "[of the Fair Labor Standards Act] Except perhaps for the Social Security Act, it is the most far-reaching, the most far-sighted program for the benefit of workers ever adopted here or in any other country. Without question it starts us toward a better standard of living and increases purchasing power to buy the products of farm and factory." Ignoring the very modern irony of calling social security far-sighted, the idea that the minimum wage law is to the benefit of workers has been the doctrine ever since. Nearly every time a candidate of either party feels the need to court the labor vote, it has been common practice to call for another raise to the minimum wage.

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In economic terms the minimum wage is a price floor, a point where no matter what the market dictates the price cannot fall beneath. Labor just like any other good is ruled by the laws of supply and demand. The law of demand insists that the higher the price of a given good, the lower the quantity of that good will be demanded. For instance, a person might drink several cups of coffee if the coffee cost a dollar per cup. However, if it cost ten dollars per cup, he may stop drinking coffee altogether. The demand for labor is a trade-off between the wage and the quantity of labor demanded. Thus the higher the wage (price), the less the company can afford and vice versa.

Labor supply works the opposite way. It has a positive correlation with the wage. The higher the wage the greater our willingness to work and the greater the opportunity cost of leisure.

Sometimes though, companies are faced with market inefficiency, which is when there is a surplus of workers on the market. Businesses have lost demand for workers and therefore lay off many. Additionally, there is an influx of workers newly attracted to the market. Therefore, the price of labor (wage) should fall until it reaches the market equilibrium. Instead, we see a large number of unemployed workers, who rather than receiving a higher wage, are receiving no wage at all.

There have been those that argue that the wealth effect (the workers still employed increase in wealth) outweighs the 'small' loss in employment. This is a problem of demand elasticity. There are products whose demand is not terribly responsive to price and these products are inelastic. These tend to be necessities such as insulin. Diabetics have to purchase insulin no matter what the price is. There are also goods that respond heavily even to small changes in price, these are referred to as elastic. These are products like fast food. If one restaurant raises its prices, it's very easy to go elsewhere.

Now one of the questions this brings up is, is the demand for the lowest wage workers elastic or inelastic. It seems that it would be leaning towards the elastic side as, if the workers were a necessity, they should have more bargaining power towards higher wages. Therefore, it would indicate that the 'wealth effect' would not in fact over power the 'substitution effect' (loss of workers).

In the months leading up to the 2008 presidential election, the two democratic candidates both expressed interest in mandating higher minimum wages. In fact, some have supported the idea of a "living wage" adjusted each year for inflation. As Senator Barack Obama even stated, "It's time to turn the page for all those Americans who want nothing more than to have a job that can pay the bills and raise a family. Let's finally make the minimum wage a living wage. Let's tie it to the cost of living so we don't have to wait another 10 years to see it rise." Additionally at a later date he included, "You gotta pay your workers enough that they can actually not only shop at Wal-Mart, but ultimately send their kids to college and save for retirement". Some have calculated this possible living wage, which would cover bills, college, and retirement to be as high as $18 per hour. That would be well over a 200% increase from the current minimum wage rate. If the demand for minimum wage workers is in fact elastic, then we would see a change in employment of over 200% as well.

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A rather extreme example of the effects of an increase in minimum wage lies in the example of the Jolly Green Giant Corporation. In 2004, Jolly Green Giant, a huge national corporation, known in grocery stores across the country, was forced to close the biggest asparagus canning facility in the country and move out of state. When Washington state increased their minimum wage to $7.16, the highest minimum wage rate in the country, they were forced to move on. The increased cost of labor was so great as to make it more financially responsible to spend all the money included in laying off an entire work force, closing a factory, and moving out. Instead of simply firing a certain fraction of the work force and paying the rest of the employees extra, they just canned them all. (bad joke I know)

There are a lot of economists that agree that increasing the minimum wage leads to many negatives. The first being higher unemployment rates. This increase hurts more than it helps. Instead of fighting poverty, it seems to contribute to the constant problem. Despite this, the rise of the minimum wage continues to be employed in greater and greater effect. This legislation is most popular during election season when politicians need to court the low income vote. Unfortunately, the populations affected by the increase in minimum wage are unable to fully understand the implications of the potential law. It is largely, thanks to their own vote, that these lowest income workers lose their jobs. Also, experts argue that raising the minimum wage may encourage kids to drop out of school. For example, economists David Neumark of the Public Policy Institute of California and Olena Nizalova of Michigan State University found that people in their late 20s worked and earned less and less, the longer they were exposed to a high minimum wage, presumably because the minimum wage destroyed job opportunities early in their work life.

Higher minimum wage can also lead to a reduction in other job benefits. Sure, minimum wage increases bring in more money, but when small businesses cant afford the said increase, they may need to cut back somewhere else in your compensation package. Your dental and medical coverage could be reduced or employers may even decide to cut back in on the job training. These cuts can dramatically reduce the overall amount that you bring in from your job.

The minimum wage affects not only the workers but also employers. These employers are giving these people (usually not very educated) jobs in the first place. If "society" decides that unskilled people should be paid more, why single out employers rather than, say, taxpayers in general, as the people to pay them?

Overall, I think that the idea behind the minimum wage is a great one. However, sometimes the execution of it is very poorly done. Obviously, a minimum wage is something that is necessary, but both employers and the legislators need to find a good balance between too high and too low of a dollar amount. Too low and it can cause a very large unemployment number or too high and it can be detrimental to the local economy, other jobs and even the drop out rate.

Citations

http://www.fdrlibrary.marist.edu/

http://timworstall.typepad.com/timworstall/2006/11/barack_obama.html

http://www.ncpa.org/pub/ba550

http://www.investopedia.com/terms/l/lawofdemand.asp

http://www.econmodel.com/classic/terms/substitution_effect.htm