There has been recent news of considering to raise the minimum wage for labor in the United States. Even though the current federal minimum wage is 7.25$, there are dozens of European countries with higher minimal wages. France and Luxembourg, for example, both have minimal wages over 10$ an hour. Last year Obama’s intent of raising the minimum wage to 10.10$ an hour was supported by various social media websites with the cause “#RaiseTheWage”. Although the superficial reasons of raising the minimal seem clear to everyone, there are several economic effects which are often not voiced.
Even though an increase in minimum wage increases the amount of money people earn per hour, this does not necessarily mean an increase in income. In some cases, employees’ wage increase will directly lead to increased costs of commodities. This increases the costs of living and so reduces the amount of money each household has available for luxury goods. Additionally, increased costs to employees for companies often causes them to decrease the number of hours of work that are available to each employee. It seems that the apparent benefits of increasing the minimum wage are not as clear-cut as they appear to be.
Unfortunately, minimal wages often lead to a possible increase in unemployment. This happens because businesses become more willing to hire employees in countries where the minimal wage is much lower. Also, businesses become more willing to use computers instead of people, like automated cashiers for example.
National Welfare Loss, which generally speaking is a loss in total efficiency of our economy, also takes place because the supply of employment is decreased to a point where fewer people can work than before. In other words, working becomes more valuable, so more people than before want to work but fewer companies than before are willing to supply jobs. Consequently, it becomes harder to acquire jobs which do not require higher levels of education.
On the other side of the argument, the increase in minimum wage is supposed to reduce overall debt in our economy while also increasing the total amount of expenditure. This is largely due to the people who stay employed having higher incomes. Additionally, increasing minimal wages boost the economy by increasing the Gross Domestic Product (GDP) as a result of increased expenditure.
Most importantly, the minimum wage issue is supposed to address income inequality gaps. As more money will be required to pay for labor big business owners will not earn as much as they did before while the income of their workers will increase. In other words, the rich lose and the poor gain. Disregarding all other factors, this theory seems very appealing.
Ideally it would be great to improve people’s lives simply by increasing the minimum wage. There is no dispute in the idea that all people should be able to afford necessary goods. Practically however, as we live in a capitalist economic system, increasing the minimal wage does not necessary have the positive effects we desire.