Minimum Wage In Labor Economic Essay, Research Paper

In the article The Minimum Wage and Product Differentials Brodley S. Wimmer discusses the effects of a minimum wage increase on employment level, productivity,on different industries.

Considering the effect of a minimum wage increase on employment level, Wimmer first noted that the real value of the minimum wage between 1966 and 1997 has decreased by 17%. The real value of the minimum wage represents the nominal minimum wage adjusted to the level of inflation. Therefore according to Wimmer, since the value of the minimum is less than what it should be in real term, small minimum wage increase would significantly reflect the level of employment. However while the real value of the minimum wage declined for that period, large increase in the desperation of wages occurred at the same time. As a consequence the moderate effect of the real value of the minimum on employment was offset by the overall increase in wages.

On the other hand, how minimum wage increase affects employment depends on many factors.

First depending on how intensively the industry affected by an increase of minimum wage uses labor, the effect on employment will vary substantially. According to Wimmer, in labor-intensive sectors such as hotel, retail-trade industry and so on, the inability of such industries to adjust their production processes from labor to capital make them more vulnerable to a minimum wage increase. For those types of sectors, an increase in the minimum wage is passed on to the customers by charging them higher prices or its absorbed by the firms that make the firms less productive where there is a decline in the scale effect. The effect of minimum wage increase does not decrease employment. To maintain their productivity, firms substitute the low skilled labor with high-skilled labor. However in capital-intensive sectors, the effect of a minimum wage increase is different because the firms have the possibility to substitute away from labor and use more capital and the firm will consider a substitution effect. As a consequence the employment level decreases. Moreover, S. Wimmer noted that because of the decrease in union membership among workers yielding a weak bargaining position of labor-intensive production processes. Therefore, employment increased during 1987-1996 while the minimum wage increased from $ 4.25 to $4.75 and later on to 4 5.15. However the minimum wage declined in real terms.

This is a graph, which illustrates the minimum wage problem.

The equilibrium shows how an industries wage in which the willingness of a worker to work equals the demand (which is the number of workers hired at a given wage) of the workers in the firm. If the government imposes an increase in the minimum wage that is above the equilibrium there will be a shortage. In this case since the minimum wage is $ 4.75 in the equilibrium if 12 workers are willing to work the firm will hire 12 workers. When the wage goes up by $5.15 the job market will attract more workers but the firm will hire less workers in this case 6. Since the firm faces with a wage increase they are likely to hire high-skilled workers to increase productivity and the 12 workers will be unemployed. Therefore, we can conclude that a minimum wage increase is not beneficial for workers in this kind of firms.

Also, Wimmer following his study of how wages and productivity move together suggested that wages would grow more quickly for department stores and hotels than in industries that sell food items. Because department stores and hotels are much more labor-intensive than food industries, wages in those sectors are much largely affected by an increase of the minimum wage. Therefore, productivity in those sectors increase much faster than in the industries selling food items.

To develop further his study point, Wimmer studied the effects an increase in minimum wage on teens and in rural areas. His findings were quite expectable: an increase in minimum wage appears to increase the wage of teens and workers in rural areas by a relatively large amount. It is because teens are primarily employed in labor-intensive industries and workers in rural areas are in labor-intensive sectors as well.

Moreover in order to explain differences between wages within the same industry for worker with the same type of skills, Wilmmer defends that such differences can only exist when firms pay efficiency wages. Efficiency wages are wages set above the average wages in order for the firms to reduce monitoring or turnover costs. For the efficiency wage models an increase in minimum wage will increase employment and improve efficiency because of the efficiency wage effect.

Also while an increase in minimum wage might increase the level of employment, according to Card and Krenger, the average hours of work decrease since part-time workers are substituted for full-time workers, mainly in sectors with highly routine and standardized task. Therefore the raise of the level of employment may be important in numbers but less hours worked.

Moreover given the complexity of the legislation and the number of exemptions for minimum wage coverage, it is quite difficult to catch the effects of minimum wage on employment. Because a firm might use outsourcing in order to avoid the increase in wages if it does not benefit from an exemption.

As for the long run consequences of a minimum wage increase, the firms have the ability to adjust their production processes. In this case demand for employment is elastic because they can substitute. Therefore in the long run, the effect on employment will be more severe then in the short-run. Where firms are unable to adjust their production processes. For instance, considering the effect of minimum wage increases on the employment of teens in the long-run, Newmark and Wascher found that when minimum wage increased between 1992 and 1994, teen employment decreased by about 2 to 3%, while in the short run teen employment would increase mostly in labor-intensive sectors.

In the short run, the effect of a minimum wage increase is predictable depending on the industry in the long run, the effect is less certain. In this case the employment is inelastic which means that the percentage decline in employment is smaller then percentage change in wage rate. For the short-run, a minimum wage increase will increase employment in those sectors where labor is most intensively used; while in capital-intensive industries, the ability for the firms to switch production process limits the benefits of an increase in employment. In some cases, employment even decreases due to wage increase

An increase in minimum wage effect is an ambiguous because of the nature of the firm. We can only look back in the past data and apply economic theory in individual firms and analyze the effect of minimum wage. As I mentioned above it all depends on the firms willingness to pay more for the same productivity or it may apply technology and reduces the amount of workers.

An increase of the minimum wage will have a higher impact on the labor-intensive firms as a greater portion of their inputs in made up of labor.

For the fixed proportion factors industries, where there may be no substitution possibilities the effect on employment might be very little if any. It also depends on the short run and the long run, which effects employment. Minimum wage increase is good for the jobs where the demand for labor is inelastic and it s disadvantageous for the jobs where demand in elastic.