This is the case in northern Europe and Canada, where minimum wages are more or less reserved for students. Over the long run, American companies are forced to turn to innovation and American workers are driven to improve their education. Only in the short run do you see suffering in terms of job losses among workers who refuse to upgrade their skills and companies who insist on competing on the basis of price against foreign firms with deeply-embedded cost advantages.
If the price floor were eliminated, the American economy would ultimately suffer. In the short run, firms would be able to hire more people, but at lower wages. This would create jobs, but would have a negligible impact on purchasing power as companies would not spend more on wages, just spread their wages around to more people. There would be significant downward pressure on real wages. For many firms, however, competing on cost is a non-starter. Manufacturing companies often cannot sell at lower prices than the Chinese if they paid their workers nothing. There is little economic value in winning the race to the bottom, at least not for an established economy.
For unskilled workers, the downward pressure on real wages would likely drive many to the welfare rolls. Aside from young workers, minimum wage workers are not the most motivated of employees at the best of times. Reducing their wages will convince many to drop out of the workforce altogether. Sadly, this will not come through an increase in skills. The shortage of workers will make it difficult for firms to expand. Those that do stay in a low wage environment are often caught in a vicious cycle of high turnover and low productivity (National Council of Churches, 2006). The psychological impact of a downward drift in the minimum wage would only serve to exacerbate that problem,...
There is little incentive to work harder, if doing so will price them out of a job.
The economics of the minimum wage are simple. It distorts the labor market in the short run, increasing business costs, putting workers out of work and increasing inflation. Eliminating the floor would likely create more jobs and allow for short-term economic expansion. However, the short-term gains are overstated, since the low cost of labor overseas already has the American economy bumping up on the demand floor for minimum wage workers. The long-term costs are understated of eliminating the minimum wage are understated. Innovation would be discouraged, as firms would be able to compete on labor cost for a few more years than they otherwise would, eventually losing out to countries with low cost structures and younger age pyramids. More workers would be discouraged from the job market, which could ultimately hurt companies if they cannot find the workers they need to grow their businesses. Eliminating the minimum wage floor would have short-term benefits, but would do long-term harm and therefore the floor should be maintained. It has probably been raised enough in recent years that another raise is entirely unwarranted at this point.
Works Cited:
Henderson, D. (2006) the negative effects of minimum wage. National Center for Policy Analysis. Retrieved November 5, 2009 from http://www.ncpa.org/pub/ba550
No author. (2006). Business owners, CEOs say higher minimum wage good for business. National Council of Churches. Retrieved November 5, 2009 from http://www.ncccusa.org/news/061031higherminimum.html
Krugman, P. (1998). The living wage. Paul Krugman. Retrieved November 5, 2009 from http://www.pkarchive.org/cranks/LivingWage.html
