Why Minimum Wages is Hard Work

Raising minimum wages seems quite a multi-faceted policy stand.

The fact is that politicians play an important role in shaping the economics of a country. The ‘popular’ economic policy speech that is still the highlight of many a news channels is the proof of atleast some truth (or the lack of it). The subject of raising minimum wages has been one of Hilary’s offerings for economic policy. The point is that ‘higher minimum wages’ don’t necessarily mean economic growth or development.

While higher minimum wage can lead to poverty reduction and economic growth (by way of income redistribution), there are certain effects of higher minimum wages that are often ignored. However, higher minimum wage does not necessarily mean that it would repair inequalities in income levels. The effect of raising minimum wages on lower-income families is marginal, if not negligible. The fact is that poverty as a variable is determined by family income, and not wages. Higher minimum wages has a secondary effect: job loss or ‘disemployment’. This occurs when, as a secondary effect, there are lay-offs of some parts of the workforce. When the number of workers reduces in this manner, there is hardly any difference in total family income, especially in lower-income families. Therefore, an increase in minimum wages may increase wages, but not income, of the lower-income families and/or groups. As a result, though the effect of such an increase in minimum wages may last for a period of one to two years, a long run effect is not known. Another possible explanation of the lack of a long run effect is the accompanying inflation. Otherwise known as the ‘Employer effect’, paying higher wages merely serves as another reason for raising prices on products and services, in order to reap higher or extant gains in the least. Another possibility is the medium to long-term imbalance in the labour market. With the current ageing population, there is every reason to worry about labor supply and demand. While higher minimum wages may offset lower benefits for lower-income families, there is a possibility that the value of these benefits may be redistributed to the middle-income families. The baseline difference in incomes aides in this estimation. The differences may be significantly visible especially in case of multiple employers, and low-income smaller employers. While there may not be any discerning effects on income levels of such lower-income families, there may be lesser labour turnover, as a result of ‘job satisfaction’ because of a rise in wages. A very delicate yet substantial issue, income inequality as the effect of higher minimum wage, and as a determining factor in balanced economic development, must be addressed along with considering higher minimum wages as a part of economic policy.

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