Public Policy Dealing With Minimum

Public Policy Dealing With Minimum Wage

Introduction minimum wage refers to the lowest hourly, daily or monthly wage that employers may legally pay to their employees or workers. The first minimum wage law, worldwide, was enacted by the government of New Zealand in 1894, followed by a similar law promulgated by the State of Victoria, Australia in 1896. Other countries followed suit and currently over 100 countries, including most industrialized countries, have some form of minimum wage law in place. ("Q&a: The Minimum Wage...")

The need for minimum wage law was felt largely due to the plight of the low-wage workers, especially women and children, who were forced to work in appalling conditions and for ridiculously low wages in the early decades after the Industrial Revolution. Unscrupulous employers ruthlessly exploited poorer workers by paying wages that were insufficient for meeting the necessities of life. In the United States, a widespread belief in the benefits of a laissez faire economy and suspicion against governmental interference prevented the adoption of a minimum wage law for a long time. However, cruel exploitation of workers by their employers during a superficial economic boom in the 1920s created dangerous levels of economic inequality, which was further worsened by the Great Depression. Finally, in 1938 under the New Deal policies of Franklin Roosevelt, a statutary minimum wage law was introduced at the national level through the passage of the "Fair Labor Standards Act" (FLSA) (Nordlund, 1-9). The Law fixed the hourly minimum wage at $0.25. Over time, the rate has been increased several times through amendments in the Act. The last revision in the Minimum Wage rate was made in 1997 when it was fixed at $5.15 per-hour -- the level at which it stands even today -- although a proposed bill to increase the rate is currently under active consideration in the U.S. Congress.

Apart from the federal minimum wage of $5.15 per hour in the U.S., more than half the States have their own minimum wage laws. Whenever employees are subject to both the state and federal minimum wage laws, they are entitled to higher of the two minimum wage rates. ("Questions and Answers About...") However, the minimum wage law does not apply to all workers in the U.S. Its application is restricted to employees of enterprises that do at least $500,000 worth of business a year (and to employees of smaller firms if the employees are engaged in interstate commerce); the law also applies to employees of federal, state or local government agencies, hospitals and schools, and to domestic workers in general (Ibid.)

The exemptions to the minimum wage apply under specific circumstances to workers with disabilities, full time students, tipped employees, workers under 20 years of age, and student-learners. For example, the FLSA allows the minimum wage of a tipped employee @ $2.13 an hour in direct wages if that amount plus the tips received equals at least the federal minimum wage; otherwise the employer is obliged to make up the difference. For young workers under the age of 20, the U.S. law has fixed a minimum wage of $4.25 per hour during their first 90 consecutive calendar days of employment, after which the normal minimum wage rate of $5.15 would apply. (Ibid).

Due to inflation and increased cost of living, the demand for an increase of the minimum wage has gathered momentum for some time now. However, the conservative / Republican dominated Congress successfully prevented a revision in the Minimum Wage Law in the recent past. Only recently, the Democrats have made a serious attempt to increase the minimum wage rate after regaining control of the Congress. At present, a Bill for a proposed increase of the minimum hourly wage to $7.15 is under discussion in the Congress and is likely to be adopted along with a hefty tax cut for small businesses.

Arguments for and Against the Minimum Wage Law

The policy regarding a minimum wage has evoked considerable debate in recent times with the conservatives and the liberals, in particular, taking diametrically opposite stands on the issue. Some of the arguments forwarded by the supporters and opponents of minimum wage policy are discussed below:

Minimum Wage Increases Unemployment? Opponents of the minimum wage policy claim that is a simple issue of supply and demand. In their view, labor is just like any other commodity in the market; if the price of labor goes up, its demand goes down. Hence if the minimum wage for labor is increased by the government, it would result in its decreased demand leading to unemployment. According to this theory, such unemployment hurts workers at the bottom rung of the ladder, i.e., the people with the lowest skills, the most; ironically these are the very people, minimum wage legislation is designed to protect. Critics of minimum wage further contend that due to the availability of plentiful and cheap labor force in the developing world, raising the minimum wage level is particularly harmful for the developed countries as its products become unproductive due to high labor rates.

Supporters of the minimum wage policy, on the other hand, beg to disagree and insist that the traditional theory of increased unemployment due to increase in minimum wage is not supported by actual data. They cite research such as the one conducted by two well-known Princeton economists, David Card and Alan Krueger, which suggests that in fact the opposite may be true. The Card and Krueger examined unemployment trends in New Jersey and Pennsylvania after the former had raised the minimum wage above the federal rate in the 1990s, while the latter had not and rather surprisingly, found that the number of jobs rose in New Jersey compared with Pennsylvania after New Jersey raised its minimum wage. (Chipman) a more recent Fiscal Policy Institute (FPI) study of state minimum wages also found no evidence of negative employment effects on small businesses. ("Minimum Wage: Frequently Asked Questions" para on "Does the minimum wage cause job loss

Minimum Wage Law Hurts or Stimulates Economic Growth? The other main argument against a minimum wage policy is that it stifles economic growth because an increase in minimum wage through legislation is an artificial interference in the market, which works best when it is driven by market forces alone. According to this theory, increase in minimum wage aggravates inflation by pushing up the costs of individual businesses as many businesses are unwilling or unable to absorb an increase in labor costs, and tend to pass them on to consumers in the form of higher prices. Other businesses, which are unable to raise their prices because of more-intense competition, face contraction or even failure. Both these effects are likely to ultimately lead to a slow-down in economic growth. (Kibbe, Para on "The Economic Effects of Minimum Wage Laws")

This argument is disputed by the supporters of the Minimum Wage Law, who are of the opinion that an increase in the minimum wage, in fact, stimulates the economy as it puts more money in the hands of low-income people who tend to spend their entire pay-checks, thereby fueling a demand-driven growth in the economy.

Limits Freedom of the Employer & the Employee: Another argument against minimum wage laws is that it puts an unfair limit on the freedom of both employers and employees as the law makes it illegal for employers to pay workers less than the minimum wage and prevents workers from providing their labor less than the minimum. Thus, a minimum wage policy, which is usually professed to be a pro-poor and pro-minorities policy, may not actually be so. The history of minimum-wage laws also shows that they were not always enacted to benefit the deprived. For example, minimum wage laws were once advocated by the white majority in South Africa and the U.S. To reduce competition for jobs in the labor market from blacks (Hoar 43). Specifically, the first federal minimum wage law in the U.S. -- the Davis-Bacon Act of 1931 -- was passed mainly to prevent black construction workers from "taking jobs" from white construction workers by working for lower wages rather than to protect black workers from exploitation (Sowell). Such examples from history, according to opponents of minimum wage, "prove" that the law only prevents the unskilled, minority workers to get employment; it being better to be employed at a low wage than to have no job at all.

Important Tool for Reducing Poverty: Proponents for increase in minimum wage believe that it is an important tool, albeit not the only one, for reducing poverty. Recent research by the Economic Policy Institute (EPI) shows that the inflation-adjusted value of the current minimum wage in the U.S. ($5.15 per hour) is 30% lower than it was in 1979. This means that the 6.6 million workers in the U.S. who are currently working at the minimum wage are about 30% poorer than they were in 1979. A federal minimum wage increase to $7.25 by 2008 would benefit these workers directly as well as another 8.3 million workers who would indirectly receive raises due to the spillover effect of a minimum wage increase. ("Minimum Wage: Frequently Asked Questions")

Some people have argued that increasing the minimum wage does not help to reduce poverty since most poor people do not form part of the labor force. This may have been partially true in the past when many poor families did not have any family members in the paid labor force. According to the Economic Policy Institute, however, a minimum wage increase is likely to have a greater impact on reducing poverty in future as welfare reform is now forcing more poor families to rely on their earnings from low-paying jobs. Certain studies such as the one by Addison and Blackburn (1999) found that federal minimum wage increases in the 1990s have reduced poverty rates, and another study (Sawhill and Thomas, 2001) suggests that a minimum wage increase from $5.15 to $6.15 in the U.S. would lift nearly 900,000 people out of poverty (Ibid.).

Social Benefits a number of other social benefits can also be attributed to an enhanced minimum wage. For example, being able to pay for their basic needs through their own earnings, rather than by handouts, adds an immeasurable amount of meaning and dignity to one's lives. Increased minimum wage would, also benefit the society in other ways too as a fair minimum wage would help build the local tax base and would reduce the spending of local taxes on social assistance programs. It would also lift the morale of the workers, contributing significantly to higher productivity, which in the end lifts the overall economy. Minimum wage increase benefits the most deprived section of the society -- the minority working women, the African-American and the Hispanics -- who are employed in the lowest-wage jobs. (Haussamen)

Public Opinion Public opinion in the U.S. has consistently been in favor of minimum wage law. One survey, for example, shows that the American public favors raising the federal minimum wage to $7.15 per hour by an overwhelming margin of 83% to 14%, and nearly half (49%) say they strongly support such an increase. Although the support for an increase is more pronounced among the Democrats (91%) and the poor, even a majority of the Republicans (72%) and the rich favor such an increase (Dimock). The across the board support for increase in the minimum wage levels among the general public is in stark contrast to the opinion held by the economists and the law makers, although this trend has also been reversed to an extent in recent years. (Chipman)

Conclusion

Having gone through the arguments for and against the policy of minimum wage, what strikes me as most callous is the insistence of the laissez faire economists to treat "labor" strictly as just another commodity. If one views the issue of minimum wage with such a sweeping assumption and ignore the humanitarian aspect of the issue, the conclusions drawn by the opponents of a minimum wage policy are perhaps understandable. What is less understandable is that the same economists, who incidentally are the most vociferous opponents of minimum wage, have the temerity to suggest that they oppose the policy because it "hurts those at the bottom of the ladder most." This, belated "concern for the poor," to my mind, is sheer hypocrisy. What the opponents, of a minimum wage law, seem to be really concerned about is a feared decline in profits of businesses. For the profit motive is the be-all and end-all for supporters of a 'no holds barred' capitalist economy; other arguments being thrown in as a smokescreen for their real motive.