Pros and Cons of Minimum Wages

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Abstract

Over the years, federal governments have taken up an active role in the determination of
minimum wages for its workforce. For this reason, the concept of minimum wages has become a crucial component in every economy. Today, this wage floor is initiated by the government to protect low-wage and low-skilled employees in the labor market from exploitation by employers. The implementation of such regulations creates significant effects in the economy. Thus, this paper discusses and highlights the pros and cons of minimum wage laws in the economy from the perspective of the labor force, consumers, firms and the government. In addition, it compares the minimum wages between the US and Australia. Lastly, it provides recommendations that the Australian government can implement.

Introduction

Most federal governments set a minimum wage legislation to protect workers in the labor
market. Typically, a minimum wage refers to a worker’s base pay per hour. Often, this base pay is set above the market equilibrium pay rate. Thus, employers are expected to pay its workforce a wage above the equilibrium pay rate. In Australia, the federal government plays an active role in the labor market and sets a minimum wage for all employees in the country. Notably, this legislation has significant effects on consumers, employers, the workforce and the government in general.

Minimum Wage Legislation in Australia

It is worth noting that Australia has one of the highest wage floors in the developed world. For this reason, the economy is entrenched as the most expensive labor market in the world. According to a 2014 report by the OECD, the nation had an after-tax minimum pay rate of $9.54 (Pannett, 2015). At the time, this rate was seconded by countries like Luxembourg and Belgium at $9.24 and $8.57 respectively (Petroff, 2015). The state’s minimum wage has been increasing steadily every year since the late 1990s (“Australia Minimum Wage,” 2017). Despite the high minimum, Australia has a low tax burden. What is more, the level of unemployment in the economy has been dropping significantly over the years.

Last year, the Fair Work Commission instigated a minimum pay raise for workers in the
country. Specifically, it increased the rate by 2.4 percent. According to the law, the minimum hourly rate is $17.70. Thus, all employers were expected to pay its employees a minimum of $672.70 every week (ABC 2016). In 2014, it increased the rate by about 50 cents per hour, to $16.87. Thus, employees were paid at least $640.90 weekly (Mondschein, 2015). In the following year, the commission further raised the rate to $17.29 per hour (Mondschein, 2015). Consequently, workers expected a minimum pay of $656.90 each week (Hurst, 2015). Notably, the Commission has consistently been increasing this rate over the years.

Source: (Trading Economic, 2017).

 

Impact of the Minimum Wage Legislation

Throughout its application, the minimum wage rule has had significant impacts on the economy. Whereas some of the effects may be positive and beneficial for the economy, others are harmful and detrimental to all stakeholders (Australian Government, 2016). Primarily, this legislation affects employers, consumers, the government and the labor force.  For this reason, it is crucial, that the formulation of these laws are evaluated carefully to weigh their pros and cons, and their overall effect on the economy.

  • Minimum Wage Legislation from the Firm’s Perspective

Typically,  this  regulation  affects  employers  and  companies  more  than  the  other stakeholders. By and large, an increase in the wage floor for workers translates to additional costs for the business. As such, it means that the employer spends more money in paying additional wages to its employees. In turn, this increases the operational costs of the company and reduces its profits. Reduced profits may force the firm to close down (NELP, 2015). Therefore, to prevent this, the company is obliged to shift the extra burden to consumers. In turn, they raise their prices, making goods and services in the economy more expensive. Subsequently, this would reduce the aggregate demand in the economy.

Alternatively, the firm may lay off some of its workers to reduce wage expenses. As a result, many workers may lose their jobs. Besides, a rise in workers compensation may force the firm to invest in machines and robots to replace the workers in the production process. Predominantly, the use of machines instead of human workers will save the company a lot of money from automated processes. Then again, the business may opt to outsource labor from other countries with lower minimum wages to do the same work for a cheaper cost. Eventually, the level of unemployment in the country will rise.

In retrospect, an increase in the minimum pay may also be beneficial to the firm.
Specifically, a pay rise will boost the workforce’s morale. In turn, this will bring about an
increase in their productivity. Enhanced firm productivity increases the firm’s earnings and
profitability. Thus, the firm may expand and improve its overall operations. In the same way, higher wages encourages workers to put more effort into their work. It also ensures that they enjoy their work. Therefore, this reduces the workers turnover (Roberts, 2013). Mostly, this is attributed to the fact that higher wages make work more attractive and reduces the rate of absenteeism. In the process, the employer gains.

A high minimum wage also ensures that the firm makes more sales. Precisely, a rise in
the level of salaries in the country means that more households have more disposable income to spend on goods and services (Wilson, 2012). Thus, the more the income, the more products and services they purchase. In turn, this increases the overall sales that the company makes, thereby enhancing its profitability. In this regard, the effects of the minimum wage laws in the country from the firm’s perspective may vary, depending on whether the pros outweigh the cons (Wilson, 2012). Thus, although the laws may have adverse effects on the firm in terms of costs, some benefits may accrue in the process.

  • Minimum Wage from the Labor Force’s Perspective

It is imperative to note that the minimum pay laws benefit workers more than any other
group. Primarily, the implementation of a pay rise legislation means that the employees earn more than they previously received (Bronchu & Green, 2014). For this reason, they have more disposable income to spend on goods and services. Most importantly, it raises the standards of living for impoverished workers as they can afford more decent housing and basic needs (Williams, 2015). Thus, low-paid and low-skilled workers benefit significantly from increased wages.

According to the workers, an increase in the least possible pay rate provides an incentive
for the unskilled and unemployed workers to seek employment opportunities at the prevailing rate. Particularly, this is due to the fact that a minimum pay rate guarantees low-skilled employees that they will receive a guaranteed minimum wage (Brochu & Green, 2014). Thus, they become more active in looking for jobs (CBO, 2014). In turn, this reduces the level of poverty and impoverishment in the society and the economy in general. Also, increasing the pay rate may help to reduce race and gender-based income inequality. Sequentially, this may facilitate a move towards income equality in the economy.

Furthermore, higher wage rates enhance job satisfaction. Normally, minimum wage
earners who do not experience constant growth in their earnings or even a raise to cover the cost of living often feel happier working after the government increases their pay (Stone, 2014). Accordingly, they are less likely to look for alternative job opportunities, quit or make pay demands since they are content with the small wage raise in the minimum wages (FRBSF, 2015). Moreover, with the intensifying living costs, individuals who earn the minimum pay have a sense of financial security.

Irrespective  of  the  benefits,  a minimum wage legislation may create significant consequences for the labor force. While the primary objective of higher wages is to help workers, it may end up harming them (Smith, 2014). As mentioned earlier, an increase in the wage rate may entice individuals who were previously unemployed to seek work. Consequently, the entry of new workers into the labor market would increase the number of people in the workforce. At the same time, firms may lay off some of its workers to reduce the overall wage costs (Mejeur, 2014). In turn, this increases the supply of labor over and beyond overall demand. Unfortunately, a minimum wage legislation is often unaccompanied by an increase in job opportunities. Accordingly, this increases the level of unemployment. For this reason, such laws may end up hurting the labor force instead of helping it.

Pros and Cons of Minimum WagesFrom the graph, the demand for labor equals the supply of labor when firms pay the
market rate. At this point, the labor market is operating at equilibrium. However, when the
government imposes a wage floor above the equilibrium level, the demand for labor drops. In contrast, the higher wages attract more workers, who were previously out of the workforce to enter the job market. In turn, this increases the supply of labor in the economy to point C. At this point, the supply of labor exceeds the demand for labor. Predominantly, this is because, at the minimum wage rate, the demand for labor is at point A (Wilson, 2012). Thus, the level of unemployment in the economy increases. From the graph, the degree of unemployment is denoted by the distance between C and A.

In addition to unemployment, wage laws may result in reduced benefits and allowances
for the workforce. Instead of raising prices to counter higher wage costs, the firm may opt to reduce its employee’s benefits. Thus, benefits such as gym memberships, reimbursed parking and paid vacations for workers may be scrapped off from the working agreement. By doing this, the company can recoup the money spent on paying employees the set minimum wage, at the expense of the worker’s welfare (Neumark, 2015). Another con associated with wage laws is that it reduces the desire of working people to advance their careers. Although a higher pay may enhance  the  employees’  morale,  it  may  destroy  their  determination  for  self-betterment (Macdowell, 2013). As such, they may become too comfortable with their current salary, and disregard the need to pursue their career further. Subsequently, this impedes the prospects for low-income staff to advance their socioeconomic stance.

To make matters worse, minimum wage legislations may raise the earnings of low-salary
employees at the expense of the higher-salaried workers. Generally, firms suppress the salary increases of these workers to pay the additional minimum wages. Over time, this results in reduced morale among the higher paid employees who may opt to leave the firm or reduce their productivity. For this reason, it is important for the government to carefully determine the overall effects that the legislation will have on the labor force before implementing the law.

  • Minimum Wages from the Consumer’s Perspective

Just like firms and the labor force, Australian consumers are also affected by minimum
wage policies in the country. From the customers’ point of view, a higher salary for low-wage workers means that they have more disposable income to purchases services and goods (Kearney & Harris, 2014). Besides, with higher wages, more individuals can afford basic needs and fundamental essentials. Sequentially, this increases the utility derived from using the products and services (Shemkus, n.d.). An increase in utility enhances the level of consumer welfare in the economy.

Notwithstanding the benefits, consumers may suffer tremendously due to increases in the
minimum wage level in the country. In Australia, firms often transfer the increased production costs to the end user. Thus, they may raise the prices of their goods and services to counter the extra overheads. As a result, this may lead to an overall increase in the general price level in the economy. Inflation in the economy is never a good thing for the consumer. Normally, the consumer is forced to pay more for the same goods and services. Hence, the money earned as a result of higher minimum wages is used up in the purchase of products during inflation. In the long run, this would mean that the pay rise was not beneficial to the consumer. Thus, for the consumers, a minimum legislation is only beneficial to them for as long as they can afford to purchase more goods and services. The legislation must be able to increase their welfare without subsequent increases in the prices in the economy. Otherwise, it would be disadvantageous.

  • Minimum Wages from the Government’s Perspective

It is worth pointing out that the minimum wage directive has gained momentum among policymakers in Australia and the rest of the world as a means to alleviate the rising income and wage inequality. However, there is much debate as to whether the policy brings about more positive or adverse effects to the economy. According to the view of legislatures, a substantial rise in the country’s minimum wage brings about significant advantages to the overall economy. For this reason, they consistently set policies that raise the minimum pay rate in the country every year, with the view that it will bring about noteworthy economic effects.

First, policymakers hold the belief that higher wages result in increased economic activity in the country. In their view, it stimulates the aggregate economy through enhanced productivity by firms and growing demand by consumers. Subsequently, an increase in the level of economic activity in the economy translates to an upsurge in the level of economic growth in the country. Besides, with higher salaries for workers, the government can collect more revenue through taxation. In turn, this significantly increases economic growth. Therefore, from this perspective, higher minimum pay rates are beneficial to the economy.

Additionally, by increasing the minimum pay, the government can considerably reduce
its expenditure on social programs. Today, the Australian government spends a lot of money to support low-income families in the country (Doyle, 2016). Therefore, by raising the minimum wage, the government reduces the number of households that are dependent on it. In the same way, a drop in the level of public expenditure on social support programs will slightly lower the taxation burden on the country’s taxpayers. Holding this mind, then one can argue that minimum wage policies are beneficial to both the government and the citizens, and should thus be executed.

Predominantly, the government’s perspective on the matter is inclined towards its
benefits to the labor force, consumers, firms and the economy in general. Characteristically, its decision to implement the wage floor in the Australian economy is founded on the basis that it creates more benefits than harm to the economy. In fact, it firmly believes that the policy stimulates economic activity in the aggregate economy for the betterment of the welfare of firms, consumers, and the labor force. However, other stakeholders may dispute this thought. To some extent, the pros associated with the policy may exceed the cons. Still, one cannot dismiss the negative implications of this law. Therefore, the government must make careful considerations before implementing wage laws in Australia.

Comparison of the US and Australia’s Manufacturing Industry Wages

For a long time now, the Australian minimum wage rate has been higher than that of the United States. The manufacturing industry is a perfect industry for comparing minimum wages between the two countries. Currently, the wages US are estimated at $20.70, a rise from last year’s $20.67 per hour (Trading Economics, 2017). In contrast, Australia’s minimum wage for this industry is averaged at approximately $20.92 per hour. In the 1950-2017 period, the average minimum wage is $8.98 in the US and 9.40 in Australia (Trading Economics, 2017). Over this period, the highest wage was recorded in January this year at $20.70 while the lowest was recorded in 1950 at $1.27 per hour (Trading Economics). Notably, the minimum wages in the manufacturing industry in Australia is higher than that of the US.

Source: (OECD, 2011)

Policy Recommendations

For the Australian economy to grow and thrive, the government must be vigilant in the formulation and enactment of wage policies. Critical to the economy’s performance is the modality in which the minimum pay rates are set and implemented in the country. Notably, one can attribute this to the fact that minimum wages can change the wage structure and its distribution within the economy (Herr, Kazandziska & Mahnkopf-Praprotnik, 2009). Also, changes in wages can influence income distribution, employment, and the price level.  Therefore, the Australian government may implement the following recommendations to harness the implications of wage legislations in the economy.

First, the Australian government should set the minimum wage at a level which affects a
significant number of employees in the economy’s labor market. By doing so, the policy will be able to raise the salaries of a significant number of people, thus creating substantial economic effects (Herr et al., 2009). Otherwise, when the regulation affects a small number of individuals, it will only have a symbolic meaning with no considerable effects to the general economy. Thus, it would be ineffective.

Secondly, the government should ensure that the remunerations grow in line with the
wage norm in the long run. That is to say, the growth in the workers’ salaries should be in line with the country’s target inflation rate and its trend productivity (Herr et al., 2009). If this condition is satisfied, the minimum wage level will help prevent the development of deflationary conditions in the economy. Specifically, if the income level in the economy rises faster than the standard wage, then the minimum salary should increase according to average earnings (Herr et al., 2009). This way, the government can prevent the wage structure from becoming wider.

Commendably, the government should continue reviewing and adjusting the minimum
wage rates frequently. Currently, this is done on an annual basis in the country. When changing this rate, it should ensure that wages increase relative to the average salary in the nation (Herr et al., 2009). Notably, this is crucial since this action goes a long way in preventing any increases in the wage gap (Herr et al., 2009). Therefore, for as long as the lowest wages are too low when compared to the economy’s average wages, the government should raise the minimum wages at a faster rate than the average salary. In the long run, this would enhance pay equality in the economy.

Conclusion

All in all, all things considered, the minimum wage policy has significant effects on the
economy. In the same way, the legislation bears substantial implications on the firm, the labor force and consumers within Australia. In the opinion of firms, minimum wages implies greater costs for the enterprise. In turn, this may result in an increase in the prices of its products or firing of some workers. However, businesses may also benefit from the law, due to an increase in employee morale, low turnover, and job satisfaction. On the other hand, consumers may view the law as beneficial given that it increases their purchasing power. Regardless, it may result in price inflation which is disadvantageous to them. With respect to the labor force, the legislation is advantageous for the fact that it results in an increase in their disposable income and standards of living. Nonetheless, it may cause an increase in unemployment. Lastly, the government implements this policy with high regard with the view that it is beneficial to the other three stakeholders and the economy in general.

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