Minimum Wage Increase Benefits

Beginning wage increases in industry sectors and on a smaller scale in businesses and organizations can have a beneficial effect on various parties. Businesses believe minimum wage increases may hurt them regarding profit, local economy, and potential health effects. While assumptions exist regarding these key issues, research suggests wage increases provide upticks in profit for companies, promote a positive work environment and less stress for employees, and there is minimal effect on the local economy. The idea that minimum wage increases encourages problems lacks key evidence both in large samples and in the long-term.
Economy
A common misconception is wage increases create job loss. The economy does not have to be negatively affected by minimum wage increases. For example, in an article titled: “Are minimum wage increases absorbed by small price increases?” the evidence suggests minimum wage increases has no major impact on local economy. As authors explain, San Jose became part of a few areas in the state where the minimum wage increased. Not only was the price hike negligible in San Jose (1.5%), there were no layoffs or reduced competitiveness to businesses, particularly restaurants (Allegretto & Reich, 2017). Restaurant demand proved spatially inelastic. “Price differences among restaurants that are one-half mile from either side of the policy border are not competed away, indicating that restaurant demand is spatially inelastic” (Allegretto & Reich, 2017, p. 35). Some restaurants gained a competitive advantage from the wage increases due to improved recruitment, illustrating how boosting minimum wages is not detrimental to a slow or downturn economy (Allegretto & Reich, 2017).
By assessing the price elasticity and demand inelasticity, Allegretto & Reich (2017), determined the citywide economy was not negatively affected. “…citywide minimum wage policies need not result in substantive negative employment effects nor shifts of economic activity to nearby areas” (Allegretto & Reich, 2017, p. 35). They measured ‘negative effect’ by evaluating employment effects and shift in economic activity. With an uptick in employment effects in the restaurants and negligible change in economic activity, Allegretto & Reich (2017), supports the potential benefits of minimum wage increases. However, some research suggests there can be negative economic effects.
When companies in countries other than the United States offer increases in minimum wages, some negative effects occur. Countries like South Africa, for example, did not see a benefit in wage increases because employers began reducing employee numbers and demonstrated higher non-wage compliance. “The results suggest a significant employment reduction in agriculture from the minimum wage (and particularly a noticeable move away from employment of part-time workers), an increase in wages on average, and a rise in non-wage benefits compliance” (Bhorat, Kanbur, & Stanwix, 2014, p. 1402). Essentially, companies that offered minimum wage increases felt they had to lessen their employee pool through layoffs and hire workers outside the legal wage rate requirements. One reason for this action is lack of competitive advantage due to poor wage regulation in South Africa (Bhorat, Kanbur, & Stanwix, 2014).
Bhorat, Kanbur, & Stanwix (2014), highlights real data confirming the fears businesses and companies have regarding wage increases. “…overall average of hours worked fell in the post-law period, suggesting that employers adjusted to some extent on the intensive margin.” (Bhorat, Kanbur, & Stanwix, 2014, p. 1402). In fact, in areas where wages remained low, workers were given more hours with fewer layoffs than in areas where businesses increased wages. “…hours of work increased more in areas where wages were lower in the pre-law period, driven largely by the fall in part-time employment” (Bhorat, Kanbur, & Stanwix, 2014, p. 1402). South Africa is not well regulated concerning wages and the various processes of the economy (Bhorat, Kanbur, & Stanwix, 2014). Because of the lack of regulation, minimum wage increases reduce competitive advantage for businesses that offer such increases.
What can be identified from this article is the potential reason why in some environments, minimum wage increases will not work. However, the United States is a regulated country and has the ability to control the way businesses operate. South Africa is an instance of poor regulation. The example from Allegretto & Reich (2017), proves wage increases can work and provide minimal negative effect to local economies.
Employees
Businesses may not raise wages because of the notion that employees will be laid off due to higher costs. Meer & West (2016), confirm these fears by suggesting drops in employment are not seen in the short-term with minimum wage increases, but can be seen in the long-term as businesses, especially small businesses cannot afford to maintain the wages. “…we find that the minimum wage reduces job growth over a period of several years. These effects are most pronounce for younger workers and in industries with a higher proportion of low-wage workers” (Meer & West, 2016, p. 1). The fear among those in business is that minimum wage increases will not fix other issues that maintain costs high for the business.
Things like rent prices, property tax, and other considerations can affect how a business pays their employee, especially regarding inflation. “To date, little is known empirically about how inflation indexing may alter the effects of a minimum wage on employment even as at least ten states now use regional CPI measures to index their minimum wages for inflation” (Meer & West, 2016, p. 22). Meer & West (2016), show a gap in literature pertaining to measurement of inflation and how inflation affects effectiveness of minimum wage increases. Suffice to say, if employees face layoffs due to minimum wage increases, this may have a negative adverse effect on employees and their health.
Not all is negative however. The restaurant industry seems to enjoy a growth due to minimum wage increases. “Even when restaurants have raised prices in response to wage increases, price increases do not appear to have decreased demand or pro?tability enough to sizably or reliably decrease either the number of restaurant establishments or the number of their employee” (Lynn & Boone, 2015, p. 1). Perhaps it is because restaurants are part of the service industry and when employees are paid well, they may be in a better mood, and more willing to adhere to and follow through with company policy and customer relations. Waiters, if they receive a higher minimum wage, may not feel the need to expect or need higher tips and therefore focus more on quality of service overall, removing some of that potential anxiety that comes with maintaining a ‘good’ performance to get more money.
Anxiety can be a negative or positive aspect to raising the minimum wage. If businesses lay off employees, they may suffer more regarding health, due to lack of work. Speaking of workers and worker health, minimum wage increases appear to not improve the health of employees. Horn, Maclean, & Strain (2017), examined how wage increases could potentially lead to a worsening of health for unemployed men “Among men, we find no evidence that minimum wage increases improve health; instead, we find that such increases lead to worse health outcomes, particularly among unemployed men” (Horn, Maclean, & Strain, 2017, p. 1). The study shows how wage increases could have a negative indirect effect on specific populations by generating more stress due to lack of resources from layoffs and job unavailability. The same phenomenon was experienced in South Africa by employees after they were laid off once the new wages increases began.
One negative about the Horn, Maclean, & Strain (2017) article is the lack of sample size for the study. It is important to find studies that use better and larger sources. Another study from 2015 demonstrates that when looking at the Current Population Survey, minimum wage increases appear to have no significant negative employment impact. “Hoffman reexamines their estimates using data from the full Current Population Survey (CPS), rather than the smaller CPS-MORG files they used and finds no evidence of a negative employment impact” (Hoffman, 2015, p. 295). Because they used a larger sample, they managed to see how true the impact of minimum wage increases is around the country.
This is why it is important to view topics from various angles. Another article details the losses and gains from minimum wage increases. While low-wage jobs decreased by 6-7 percent, there was an increase in hourly wages by 3 percent. Meaning, the actual different was negligible overall. “Evidence attributes more modest effects to the first wage increase. We estimate an effect of zero when analyzing employment in the restaurant industry at all wage levels, comparable to many prior studies” (Jardim et al., 2017, p. 1).
Profitability
Businesses often have a number #1 reason for discouraging the practice of raising the minimum wage and that is reduction in profits. A study from Vietnam detailed how minimum wage increases did not negatively affect profits. However, it also did not have a positive difference. The overall difference was not statistically significant. “It is found that the impact estimate of the minimum wage increase in 2005 from 290 to 350 thousand VND on firms’ profit margins is very small and negative and not statistically significant” (Cuong, 2013, p. 790).
Profit is an important aspect to promoting or avoiding minimum wage increases. When companies in Vietnam and in the United States see benefits in employee retention or no reduction in profits after implementing minimum wage increases, it shows it can be done. The overall stance on minimum wage increases from this literature synthesis is that the ‘potential negative consequences could come from small samples and do not take into consideration the large amount of positive effects it can have on employee morale and employee retention. This is seen especially in the restaurant industry where employees feel better and more satisfied with higher minimum wages. With higher morale, they produce more and thus it can lead to improved profits for employers.
However, research also suggests the differences may be negligible. If they are not statistically significant regarding employee retention and profitability, but can lead to improved morale amongst employees, why can it not be a technique utilized by business to improve overall employee quality within the company? Such a concept rings true for those working in the serving industry. Though, they may not for businesses in other industries and in countries with poor regulation.
Conclusion
In conclusion, the rise of minimum wages is a positive action that may result in improved morale and productivity with negligible impact on profitability. Nonetheless, there are many things to consider when suggesting to businesses to raise their minimum wages. One thing to consider the kind of industry they operate in and how it affects their ability to sustain wage increases. Countries like South Africa have shown to not accommodate wage increases successfully because of poor regulation. However, in the United States, in cities like San Jose, minimum wage increases do not negatively affect the local economy, especially pertaining to the service industry. It all has to do with context, environment, and industry.
References
Allegretto, S., & Reich, M. (2017). Are Local Minimum Wages Absorbed by Price Increases? Estimates from Internet-Based Restaurant Menus. ILR Review, 71(1), 35-63. doi:10.1177/0019793917713735
Bhorat, H., Kanbur, R., & Stanwix, B. (2014). Estimating the Impact of Minimum Wages on Employment, Wages, and Non-Wage Benefits: The Case of Agriculture in South Africa. SSRN Electronic Journal, 96(5), 1402–1419. doi:10.2139/ssrn.2184248
Cuong, N. V. (2013). Do Minimum Wage Increases Matter to Firm Profitability? The Case of Vietnam. Journal of International Development, 29(6), 790-804. doi:10.1002/jid.2920
Hoffman, S. D. (2015). Are the Effects of Minimum Wage Increases Always Small? A Reanalysis of Sabia, Burkhauser, and Hansen. ILR Review, 69(2), 295-311. doi:10.1177/0019793915610558
Horn, B., Maclean, J., & Strain, M. (2017). DO MINIMUM WAGE INCREASES INFLUENCE WORKER HEALTH? Economic Inquiry, 1. Retrieved from ftp://repec.iza.org
Jardim, E., Long, M., Plotnick, R., Van Inwegen, E., Vigdor, J., & Wething, H. (2017). Minimum Wage Increases, Wages, and Low-Wage Employment: Evidence from Seattle. doi:10.3386/w23532
Lynn, M., & Boone, C. (2015). Have Minimum Wage Increases Hurt the Restaurant Industry? The Evidence Says No! CENTER FOR HOSPITALITY RESEARCH REPORTS. Retrieved from https://scholarship.sha.cornell.edu
Meer, J., & West, J. (2016). Effects of the Minimum Wage on Employment Dynamics. doi:10.3386/w19262