Minimum wage, good or bad?

 

In this blog, I will be discussing these points:

• 1.       What is minimum wage and what are the rates?
• 2.       What it was intended to do
• 3.       What effects does it have in the broader economy?

 

Minimum wage is the lowest salary, per hour, an employer can pay their employees. The minimum wage varies country to country and state to state, some countries such as Singapore do not even have a minimum wage. In the USA, Federal minimum wage is set at $7.25 however individual states can set the minimum wage higher than the Federal requirements if they wish to, for example Washington D.C. places their minimum wage at $15 and California’s minimum wage is $14, these being the highest rates in the country. In the UK, the lowest an employee can be paid is £8.91 as of 2021. These hourly rates only apply to adults, the minimum wage decreases if the employee is under the set age, such as in the UK, the minimum wage for under 18s is almost half of the minimum wage applied to those above 23.

Why was minimum wage created? Established in 1938 by Franklin D Roosevelt- to combat the ultra-low wages post great depression (1929) in the USA. After the great depression, the companies in the USA were paying their employees pennies a day, and, to protect these people, FDR set minimum wage at $0.25 ($4.77 in today’s USD). At the time it was very effective as the workers’ living standards rose significantly due to higher incomes. This meant that employers were no longer able to abuse the wages of the workers.

But does a higher minimum wage mean that the workers benefit? On the surface, it sounds obvious, because the employees get paid more, right? Wrong. The people that a high minimum wage is supposed to help might end up costing those same people their jobs. This is because the minimum wage destroys all the jobs that delivered less value (in services) to the employer than the job position is worth. In simpler terms, if an employer owns a restaurant and would like to get a worker to only be making fries so that the fries would be cooked quicker and better this would make the restaurant an additional £5 per hour which would be helpful, but the government set minimum wage in their country is £8.91, then the potential job position, as opposed to making the business a profit, would cost the employer £3.91. Therefore, the job is never created, and an unemployed person remains unemployed. Due to this, the minimum wage policy would be detrimental to individual businesses, which adds up to have a significant impact to the economy. Evidence of this is any country which has either a low minimum wage or none at all having a low unemployment rate for example Singapore, this year the unemployment rate in Singapore is 4% which doesn’t seem to be good but in the UK it was 4.8% and in the United States it is 5.9%. However, these figures are of the aftermath of the impacts of Coronavirus. On the other hand, even in 2019 Singapore’s unemployment rate was 0.75% lower than the UK and 0.4% lower than the US. Clearly depicting that it is easier to obtain jobs in Singapore than it is to get jobs in the US and in the UK

The opposing side to this discussion, would claim that it is morally foul for an adult worker to be working for less than £5 per hour because it would be unjust and cruel to the workers. However, it is the exact opposite. The fact that a worker takes a job that pays less than £5 per hour means that they cannot obtain a job which provides a higher income stating that they would be unable to get a job that would be legal and above the minimum wage, forcing them into unemployment or to fall into a financial well of debt. This would make it further morally foul to disallow many people from a steady income. If the minimum wage was removed, then there would be very many jobs available to lower skilled people allowing them to gain skills in their field to obtain better, higher paid jobs in the future. The skills one gathers from working in a job is why many employers look for their potential employees to have work experience.

Another point for minimum wage would be, “what is to stop businesses exploiting workers like they did in 1938?” This would be resolved by more restrictions on collusion of businesses, which would create competition, triggering an economic concept known as game theory.

A famous example of game theory is “The Prisoner’s Dilemma” in which there are 2 prisoners kept in 2 separate rooms and they have each committed 2 different crimes. The police have conclusive evidence on the 1^st crime which is a relatively minor charge, and the 2^nd crime requires a confession from the criminals to charge the other prisoner with the major crime. Here if neither of the prisoners incriminate the other, both criminals are only charged with 1 year of prison time, but if one of the prisoners confesses, the other prisoner receives 5 years of prison time, and the defector is set free. However, if both of the prisoners defect then they both get 3 years of prison time. So, what should they do?

Ideally both suspects should remain silent as, together, they only spend 2 years of prison time. Then, the second-best option is if one of the prisoners defect and the other remains silent, however, if both the prisoners defect then it is the worst option as the prisoners are jailed for 6 years overall.

How does this relate to competition in businesses and abuse of no minimum wage? If “Business A” requires large amounts of employees during a shortage of applicants, then it would increase the hourly wage of the potential employees to attract more applicants, meaning that some businesses will lose employees to “Business A” causing them to match the elevated hourly wage of the other “Business A” to refill the gap of employees. And thus, the hourly wage across the market would increase.

So, finally, should minimum wage be removed? I certainly think so. I believe that a smaller steady income is significantly better than having no income at all. And I also think that it is incredibly difficult for collusion to take place due to a multitude of separate businesses competing for the same resources, meaning that a monopolies or collusion at that scale is practically impossible. Minimum wage is broadcasted very incorrectly as it is shown to be fantastic by media and is used as a political tool to gain more votes, usually used by socialist governments only to betray the people who voted for them.