Financial payment to workers or employees by employers is called wages. Wages are used to compensate for time and labour that employees have put in as work in the service of their employers. What determines the value of wages is market forces. Minimum wage is the lowest amount of pay an employee can be paid for work done. This is defined in law making it illegal for an employer to pay his employee amounts lower than the set minimum wage. Before the enactment of minimum wage in various jurisdictions, workers used to be taken advantage of by their employers. Minimum wage is meant to protect those workers from exploitation by being underpaid. Over the years though, debate has raged on the benefits of minimum wage especially in fighting poverty. The amount set has always been an issue on either side. A number of alternatives to minimum wage have been proposed.
The first nations to enact minimum wage laws are New Zealand, Australia and the United Kingdom (Starr, 1993). In the United States, minimum wage was introduced in 1938. Currently, most jurisdictions have some law that define the lowest amount a worker can be paid. The amounts vary from jurisdiction to jurisdiction. These amounts are determined by a number of factors. These factors are to ensure loss of jobs is kept to a minimum while still maintaining the competitiveness of the businesses. So, to determine minimum wage, market conditions are observed. Some of these are gross domestic product, supply and demand of labor, inflation, terms of employment, living standards, bankruptcy trends, growth of businesses, operating costs of businesses, cost of labor and distribution and growth of productivity. Others are concerns of businesses on the effect of minimum wage on their bottom lines through increased business costs and the knock-on effects that will result.
Arguments over minimum wage
Minimum wage targets workers at the lowest scale of employment. Arguments for and against minimum wage have mainly been centered on whether it actually helps them or not. Whether poverty is reduced or not. On one side we have the general public who are in support and the other we have a number of economists who are against. To better understand both sides, it is important to look at both arguments. The benefits and harm of minimum wage. For the proponents of minimum wage, they list a number of benefits that minimum wage brings. The major benefit is in reducing poverty because the standard of living of the very poor is increased. It takes care of the very vulnerable in society. People are encouraged to find employment reducing reliance on social safety nets. This reduces governments’ spending on welfare. Joining the workforce also encourages them to stop illegal means of getting money like selling drugs and robbing others. Joining the workforce will also encourage others to work even harder and move up the ladder. For workers who were feeling exploited, minimum wage acts as an incentive that will increase their productivity. With increased money in circulation, consumption increases giving products a bigger market. And for businesses that do not like the additional costs brought by minimum wage, they will look for alternatives that might entail innovations in technology. It will be better to invest in technology developments than to continue incurring increased labor costs.
For the opponents of minimum wage, their main point is that it is not an effective tool in fighting poverty. This is because whatever minimum wage sets out to achieve gets undone in the long term. Unemployment will increase. Businesses will have to trim labor to accommodate the increased costs as a result of minimum wage set. Some businesses may be forced to outsource some jobs overseas or automate their processes. The other alternative will be to increase purchase prices of products in order to accommodate the increased labor cost. This will result in rise in inflation. Another cause of rise in inflation will be the increased money in circulation. Minimum wage brings about reduction in the work quantity demanded of workers vis a vis the amount they will be paid. Cost of conducting business in a jurisdiction will also increase as a result. Minimum wage can cause certain groups in society to be excluded in the job market. Making it easy to join the labour market for the poor works against them pursuing further education. Increase in unemployment and inflation will push the poor people even further into poverty.
Alternatives to minimum wage in tackling poverty
Economists have come with a number of alternatives to minimum wage in fighting poverty. This is because they claim minimum wage is not effective. One of the alternatives is for a nation to provide basic income to all her citizens. Giving every citizen basic income gives the citizens a bit of freedom. This freedom extends to looking for employment. They can negotiate for better paying and satisfying jobs. They can even spend more time to study and increase their skills making them eligible for jobs that pay better. Experiments are being conducted in a number of countries to see the viability of basic income (Weller, 2017). In these experiments, a set is chosen of people who are given basic income for a period of time. What is observed is most of them embark on activities to improve their lives like studying. The other alternative is having a guaranteed minimum income. This is almost the same as basic income with an added provision of the recipient working in some capacity somewhere or even perform services to the community. Having a refundable tax credit is another alternative to minimum wage. This is where a household’s tax liability is reduced to a negative which will result in money flowing to the household from the government. Proponents of it argue it is better than minimum wage because of its targeted approach in fighting poverty (Scharfenberg, 2014). United States and the United Kingdom are examples of nations with refundable tax credits. Examples in those countries are child tax credit, earned income tax credit and working tax credit. Nordic countries have collective bargaining as a way of setting minimum wages as opposed to legislation (Olson, 2009). It is another example of alternatives being proposed. The government does not lead the effort of minimum wage through legislation, instead all players are involved like unions and the private sector. They bargain and agree what works best for all. The other example of an alternative to minimum wage is wage subsidies. In this example, the government makes payment for work done.
There are advantages and disadvantages to a nation in effecting minimum wage. It can lead to increased growth of the economy and improve lives of the poor. Or it can lead to increase in unemployment and inflation. A gradual rise in minimum wage has been seen to be beneficial though. To enjoy the benefits of minimum wage, a balance need to be struck.
- Olson, P. (2009, September 1). The Best Minimum Wages In Europe. Retrieved from Forbes: https://www.forbes.com/2009/08/31/europe-minimum-wage-lifestyle-wages.html#79c2a4f5680c
- Scharfenberg, D. (2014, April 28). What The Research Says In The Minimum Wage Debate. Retrieved from Wbur News: http://www.wbur.org/news/2014/04/28/minimum-wage-policy-shop
- Starr, G. (1993). In G. Starr, Minimum Wage Fixing: An International Review of Practices and Problems (p. 1). International Labour Organization.
- Weller, C. (2017, January 24). Basic income experiments to watch out for in 2017. Retrieved from Business Insider: www.businessinsider.com/basic-income-experiments-in-2017-2017-1