The Impact and Relevance of Minimum Wage Laws

Jinyang Zhang
ECO-202
Prof. Fionte
12/10/2020
BHCC Microeconomics -The Impact and Relevance of Minimum Wage Laws
Background and introduction on minimum wages
The Fair Labor Standards Act (FLSA) of 1938 covers some workers who are entitled to the minimum wage except for some employees such as highly-compensated individuals, employees of government agencies, public corporations, executives, professionals, administrators, and those working in the judicial and legislative branches. Besides the minimum wage, the FLSA focuses on pay, hours worked, equal pay, overtime, and record-keeping, and child labor.  FLSA-2004 regulations changes required that those being $23,660 annually be paid overtime if they worked more than 40 hours in a week, while those earning $100,000 were exempt (BT LG). There are social welfare, employment, and economic effects of minimum wage laws, and evaluating their impact on employees and employees provides insight on the effectiveness of these laws.
Review of literature
In some countries, the minimum wage is one of the main instruments to reduce poverty and inequality and is targeted towards the benefits the low-paid workers. In some cases, the minimum wage is aimed at improving labor productivity and correcting the labor market inefficiencies. Differences in labor market concentration levels mean that the minimum wage does not always have a negative impact on unemployment in highly concentrated markets (Azar et al. 13). There are arguments made for and against increasing the minimum wage level, and from theoretical and empirical approaches, research shows that the effect of the minimum wage on the labor market and productivity can be positive, negative, or ambiguous. Thus, a review of literature is useful to evaluate the impact of the minimum wage on unemployment and indicators of labor demand.
The least-skilled workers are most likely to be affected by increases in the minimum wage are the least skilled workers. As such, the effects of rising minimum wage disproportionately affect groups of workers who work in jobs that require few transferable skills, including the youth, women, youth, and inexperienced workers. For these workers, improving their labor productivity would likely require training and adopting more skills. Nonetheless, changes in the minimum wage laws have minimal adverse effects on employment when the minimum wage is already low, and at times, there is a reduced probability of unemployment. Jardim et al. (32) found out that an increase in the minimum wage level resulted in low-skilled workers in Seattle foregoing employment opportunities when considering elasticity of employment, the effect of higher hourly gain. The effects of the increase in the minimum wage are also largely on the industry, the type and size of business. Considering differences in unemployment over years, regions, and specific industries provided insights on the trends and patterns of employment when wage laws were implemented.
Characteristics of the US labor market at the time the wage laws were adopted influenced the level of unemployment as there has been a decline in the high-wage unionized manufacturing jobs over decades. According to Schmitt (575), there have been modest increases in the US minimum wage levels, and employers have adjusted well to these changes even in sectors where there is a high concentration of low-wage workers. When there is an increase in the minimum wage level, there is a high likelihood of displacement of workers from industries that tend to operate on low-profit margins, such as the restaurant industry and other businesses in the service sector. Addison, Blackburn, and Cotti (3) reported that there was little evidence to suggest that higher minimum wages caused disemployment effects in the low-wage sectors in the retail market.
Empirical evidence shows that the minimum wage policy has a varied impact on different groups of workers. Minimum wage policies are used to protect the wages of employees who are the most vulnerable workers, including some of the least productive workers. However, minimum wages are inefficient to provide higher income for poor families when considering the tax effect on prices where there is a value-added effect and compared to the state sales tax (MaCurdy 517). It is no surprise that researchers increasingly focus on evaluating the impact of workers who are potentially vulnerable to increases in labor costs. The minimum wage policy has adverse and disproportionate effects on groups of most vulnerable workers, and this is observable at the
Impact of raising the minimum wage on employees
Conventional economic theory and models hold that under a competition model perfect, the establishment of the minimum wage above the value of the marginal productivity of workers would create unemployment. The magnitude of the reduction in employment will depend on the elasticity of demand for labor. However, the alternative view is that increasing the minimum wage makes it possible to have higher labor demand. Such as when the minimum wage level is raised but still below the wages and salary levels that would be expected of perfect competition. Furthermore, the efficiency wage theory holds that higher wages increase the productivity of workers, and companies reduce monitoring costs. This implies that increasing the minimum wage would result in increased employment.
By establishing minimum standard wages through minimum wage laws targeting improving the social welfare of the low earning workers so they can get lower earners so they can raise livable wages. The idea behind this is that workers receive too little wages and face difficulties surviving and even overburdening the welfare system. The federal minimum wage is $7.25 per hour for non-exempt employees since July 2009, but states have enacted separate minimum wage laws above this level. This is especially for states with higher than average living costs, where there have been various proposals to increase the minimum wage up to $15 per hour. Nonetheless, wages for the low-paid workers have mostly stagnated since the Great Recession, with their purchasing welfare declining, as is their social welfare.
Table 1: Federal Minimum Hourly Wage for Nonfarm Workers for the United States
Source: https://fred.stlouisfed.org/series/FEDMINNFRWG#0
The minimum wage laws are also meant to increase wealth distribution to the poor workers and their households, and this also focuses on improving their welfare. Minimum wage laws also target lowering income inequality for low-income households as they target reducing the distributive inequality. However, a minimum wage level does not always achieve the intended outcome as it is easier to fire low-wage earners without incurring a high cost of replacing them. A smaller share of low-wage earners gets above the minimum wage in the service industry when compared to other industries. additionally, hiring and firing is easier in the sector as few skills are required for some jobs in the restaurant and retail industries; the effect of an increase will is higher when the minimum wage increase in the industries that have a high concentration of low-wage earners
Even as there are state laws that provide greater employee protections, higher minimum wages are not always the best option to improve the employees' welfare without overburdening e employers. For instance, the minimum wage interferes with the labor market, and sometimes, the Earned I...