Minimum Wage and the Poverty Gap

Introduction

According to the Union of International Associations (2007), the lack of minimum wage fixing escalates industrial conflict and impedes the development of stable collective bargaining relationships. Likewise, levels of wages not enough to maintain family life, long hours of work, women’s night work, industrial homework, sweatshop methods, and child labor were identified to be common in the early stages of industrial expansion in nearly all countries. But as countries grow wealthier, the income of adult workers increases and ceases to be a matter of economic necessity for wives to work in factory night shifts or for children to be sent out to earn supplementary wages. However, in many less developed countries, poverty is still a compelling force behind these and other socially undesirable forms of industrial labor, defying laws and regulations. It was proposed that these abuses are difficult to correct where factories are small in size and large in number compounded by weak public administration and the cost of adequate policing and inspection disproportionately high.

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While policymakers trackways to address issues and problems on minimum wage policy and increases, political parties busy themselves on how to maximize gains out of the minimum wage issue properly converted into publicity and electoral votes.

This paper shall try to find out whether an increase in minimum wage decreases the poverty gap and present the advantages and disadvantages of an increase in the minimum wage policy.

Discussion

Minimum Wage

Minimum wage is understood as the lowest amount that employers may pay employees for an hour of labor. In the U.S., both the federal government and individual states are entitled to set a minimum wage of which instance the two differ, the higher wage applies. As of January 2007, twenty states had a higher minimum wage than the federal wage, while only Kansas had a lower wage. Five states had no minimum wage, while fifteen had one identical to the federal wage.

The Democratic Party’s control of both houses of Congress following the 2006 congressional elections had the promise to increase the federal wage to $7.25/hr. in its “first 100 hours” on the floor. By January 10, 2007, the House was able to accomplish this through the passage of H.R. 2 by a vote of 315-116. Again, January 30, 2007, saw the Senate clearing the bill for a vote on the floor to raise the wage to $7.25, and provide about $8.3 billion worth of tax breaks for small businesses (Jayson, 2006). In May 2007, the wage hike and some of the tax breaks were included in a supplemental spending bill regarding the war in Iraq. On May 25, 2007, President George W. Bush signed the bill into law, and the first wage increase occurred on June 24, 2007, bringing the minimum wage to $5.85. This would mean that the US’ lowest-paid workers soon find extra money as the minimum wage rises 70 cents to $5.85 an hour today. The raise was reported as the first increase in a decade (Holland, 2007).

The increase of the minimum wage ends the longest span without a federal minimum wage increase since it was enacted in 1938. It was said that the previous increase came in September 1997 in a bill signed by President Bill Clinton raising the minimum to 40 cents, equivalent to $5.15 an hour. Legislation signed by President Bush in May aims to increase the wage by 70 cents each summer until the year 2009 so that all minimum-wage jobs will be paying no less than $7.25 an hour. Accordingly, government figures show about 1.7 million people earned $5.15 or less in 2006 (Holland, 2007).

The minimum wage increase was considered one of the few major legislative successes of the Democratic-controlled Congress. Lawmakers have added the increase to the $120 billion Iraq war spending bill Bush initially vetoed due to the Democrat’s insistence of a troop pullout date. However, Bush signed the bill on May 25 after the Democrats removed their pullout provision (Holland, 2007).

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But to make the minimum wage provision agreeable to Republicans, the Democrats added $4.8 billion in tax breaks for small businesses to enable them to hire new workers as well as offset costs associated with an increase in the minimum wage (Holland, 2007).

The Democratic presidential candidates have been using further minimum wage increases as an issue in their primary campaigns as more than two dozen states and the District of Columbia already have minimum wages higher than the federal level (Holland, 2007).

It was suggested, however under the Democratic measure, the minimum wage would jump to $5.85 within 60 days of enactment, and the succeeding year, the wage would rise to $6.55, then, reaching $7.25 a year after that. The bill would also apply the federal minimum wage to the Northern Mariana Islands, a U.S. protectorate that was protected from federal labor laws for years because of the efforts of now-imprisoned lobbyist Jack Abramoff and his Republican allies in Congress (Weisman, 2007).

The Democrats estimate that a minimum-wage increase will lift the income of 13 million workers of which 5.6 million earn the current minimum wage and 7.4 million just above that level. “Today we finally release them from being frozen in time, stuck at that wage level when their gas prices are higher, their education prices are higher when their medical costs are higher,” said George Miller of California, also the House Education and Labor Committee chairman and the bill’s author was quoted ((Weisman, 2007).

Advantages and Disadvantages

Minimum wage increase may be initially advantageous to a general majority of workforces in any country for that matter. For the many workers who may be receiving such a rate, it would add up to their purchasing power. The increase could alleviate other necessary expenditures as well as provide for cash for much-needed purchases.

Recent studies have at most, suggested that increasing the minimum wage is a useful antipoverty tool. In a study that examined the influence of minimum wages and other important variables on US family poverty rates using state data over the years 1984-98 by that took into account labor market influences, demographic factors, and differences in poverty rates across states, it was found that expanding the minimum wage coverage and increasing labor force participation both have larger effects on poverty rates as compared to equivalent changes in the level of the minimum wage (Stevans & Sessions, 2001).

The study further implied from the empirical results that the most effective means of lifting families out of poverty are policies that are directed toward increasing minimum wage coverage, encouraging increased labor force participation, raising the minimum wage, and subsidizing higher education (Stevans & Sessions, 2001).

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It is often argued that although supporters of minimum wage laws improve an economic lot of low-wage workers, it also leads to reduced employment among this group making the effects on poverty remain ambiguous (Addison and Blackburn, 1998).

It was further suggested that an increase in an effective minimum wage shrinks the employment of unskilled labor, thus dis-employment and uncertainty on the distribution of low-wage work. While other workers gain, some lose, so that the benefits of minimum wage increase are not distributed evenly across low-wage workers. Also, in reality, it is unclear whether low-wage workers would gain in an unexpected earnings sense because the impact on average earnings depends on the scale of the displacement effect and labor supply elasticity (Gramlich, 1976). The absence of dis-employment effects could point out a transparent implication since every low-wage worker would gain in this case.

The joint presence of losers and gainers from minimum wage increases makes the issue ambiguous in the family income distribution. Earnings are not simply the focus when it comes to the family effects of a minimum wage increase. It was suggested that effects of minimum wage increase include:

  • Affect the labor supply of other members of the families of workers directly affected by the minimum wage.
  • Involves both income and cross-substitution effects.
  • Difficult to predict responses.
  • Heavy dependence on the initial family income position of workers whose earnings are increased by the change.
  • Little guidance from the theory that identifies the position in the family income distribution of workers who might lose jobs when the minimum wage increases.
  • Losers and winners in the matter may change their living arrangements as a result of their reduced or increased earnings (Addison and Blackburn, 1998).

While the above-enumerated ambiguities need further studies and details to provide accurate meaning for the positive and negative effects of a minimum wage increase, this further aggravates the general idea that a minimum wage increase could alleviate poverty, or that advantages are at the forefront.

The presence, however, of negative employment effects do not necessarily imply that minimum wage constitutes a bad social policy. Gramlich (1976) suggested that employment losses associated with the increase of minimum wage are acceptable if there is an increase in the income of the poor or near-poor families. “Minimum wages do, of course, distort relative process, and hence compromise economic efficiency, but so do all other attempts to redistribute income through the tax and transfer system. The important question is not whether minimum wages distort, but whether the benefits of any income redistribution they bring about are income political sense sufficient to outweigh the efficiency costs (Gramlich, 1976, p 410).

It has also been suggested that to raise the incomes of low-income families, minimum wages must accomplish two things: to redistribute earnings toward low-wage workers and that some of the low-wage workers who benefit from it must be in low-income families. The study conducted by Newmark et al (2004) regarding the wisdom of the minimum wage as a social policy asked if minimum wage increase raises the incomes of families at the lower end of the income distribution. They suggested that although modest dis-employment effects of minimum wages have often been interpreted as implying that minimum wages are likely to achieve the goal, there had been little basis due to the absence of direct effects of minimum wage on family incomes. This was evidenced from non-parametric difference-in-difference estimates of the effects of minimum wages on the income-to-needs distribution and on the distribution of changes in income-to-needs that provide a complete characterization of the changes in these distributions induced by increases in the minimum wage Newmark et al (2004). The study concluded that reductions in poverty or near-poverty could not be counted among the potential benefits of minimum wages.

However, in a news report (Walker, 2006) regarding the Florida minimum wage increase to $7.25, unemployment was reduced from 4.9 percent to 3.1 percent. Two years earlier, Rick McAllister, president, and chief executive of the Florida Retail Federation were saying that boosting the floor above $5.15 “could have a billion-dollar inflationary effect” on Florida’s economy (Walker, 2006). But the State saw 200,000 new jobs created within the first year of voters’ overwhelming approval of the hike and the industries most affected include trade, leisure and hospitality, and food services.

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The robust growth was evidenced by studies conducted by Bruce Nissen of Florida International University, the University of Chicago, The Fiscal Policy Institute, and Princeton University that established employment in states with higher minimum wages tend to grow at multiples of those with lower requirements. The studies indicated however that in 2005, about 479,000 people nationwide worked at the federal minimum of $5.15, while another 1.4 million worked for less. Roughly 10.3 million workers earned $5.15 to $7.15 — 13.6 percent of wage earners and 8.14 percent of all workers (Walker, 2006).

It was expected that the minimum wage increase will put more pressure on businesses already struggling with things like rising insurance costs and taxes but many small businesses have learned to cope and were shown to have been coping well (Walker, 2006).

On another note, damage to the profitability of employers has always been the more apparent reason why minimum wage cannot be raised. It was suggested, however, that the minimum wage must be converted into a living wage. Enacting a bill as close would be a great short-term solution although it was proposed that something bigger must also be considered: a wage that keeps up with inflation (Jayson, 2006). It was suggested further that “First, abolish the federal minimum wage, or just make it apply to government jobs. Second, transfer this power to the states, mandating that they establish a living wage. The reason for this is because the living wage will vary from state to state, and perhaps even from borough to borough. The living wage is tied directly to the cost of living and is better suited for the state governments to oversee this program. It would also be encouraged that they determine the living wage by the “basket of goods” method, that way, inflation [is not] an overt issue, since it’s then tied to the goods & services in the “basket.” For example, a gallon of milk could be $1.00 one year, but $2.00 the next year, when calculating the cost of the living wage, the inflated cost is already accounted for,” (Jayson, 2007).

Social reasons are also posed as another factor to consider in the “minimum wage increase” debate as studies already suggested how many low-wage earners have to juggle between three jobs to keep up with basic needs alone. This would spell out less time with their families, fewer ways to find a better living such as taking up help from various government-subsidized, welfare, and educational programs, among other things. Further, Jayson (2006) noted and asked even Congress gave themselves a “cost of living” raise during their sessions. “If a bunch of already rich people is entitled to a cost of living raise, shouldn’t everyone be allowed the same privilege?”

Conclusion

It is not very definite whether minimum wage policy, its regularity, and implementation, as well as its package deal that include among others increase of prices and rates of basic commodities and services such as oil, food, water, electricity, as well as the increase of industry tax rates, do have a positive effect on poverty as well as pose more advantages than disadvantages, in the majority of peoples’ lives or the economy as a whole.

In the shorter and more apparent view, low-wage workers would push for the implementation of a higher minimum wage with the hope that a few cents per day could ease up the burden for daily consumption. It is also to be considered that even industrialized and first-world economies have a majority working class so that many countries are afflicted by the necessities that needed to be dealt with when it comes to low wages and minimum wage.

On the other hand, as earlier discussed, it was not the implementation of an increase of minimum wage that could affect a very positive economic and social scenario but a well-balanced wealth distribution among the majority of people. And far from the nearest clue, there are still a lot of considerations that need to be enforced as well as addressed before expecting positive results out of a minimum wage increase: ethical ramifications of a market economy, questionable and biased global trade policies, and giving due to the importance of the global workforce currently concentrated instead to big business investors.

As already posted earlier, while those who already have it economically still need “cost of living” allowances, it is not enough to assume that setting a ceiling for already below-the-decent-living-cost of low-wage earners could solve poverty and low-income problems. Decreasing the poverty gap is entirely out of the picture and that the minimum wage policy issue has a long way to go, if not totally a wrong policy. The suggestion to gauge a cost of living per locality or state and provide a realistic “living wage” that could cover decent family expenditures for the majority of low-wage workers is more palatable and attractively workable. The time has come that even education of the next generation must be properly ensured not only in policies but also in basic agenda involving workers and their families.

References

Jayson, “Minimum Wage”, JunkZone, 2006. Web.

Jim Kuhnhenn, “Senate clears the way for minimum wage vote,” Houston Chronicle, 2007.

California Employment Advisor (2007). “Wage and Hour: President Signs Federal Minimum Wage Increase Legislation,” California Employment Advisor.

Holland, Jesse, J. (2007) “Minimum Wage Will Rise Today.” Associated Press/ Washington Post.

Stevans, L.K. and David N. Sessions (2001) Minimum Wage Policy and Poverty in the United States.” International Review of Applied Economics, Vol 15 (1), 65-75.

Addison, John T. and Blackburn, McKinley L. (1998) “Minimum Wages and Poverty.” Paper provided by ZEW – Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research in its series ZEW Discussion Papers with numbers 98-42.

Union of International Associations. “Absence of agreed minimum wage.” From MMVII Union of International Associations (1907-2007) (UIA profile in the Yearbook).

Gramlich, Edward (1976). “Impact of Minimum Wages on Other Wages.” Journal of Human Resources, Vol. 18, No. 3. pp 359-78.

Walker, Devona (2006). “Higher wage, minimum problem.” Herald-Tribune.

David Neumark & Mark Schweitzer & William Wascher, 2004. “The effects of minimum wages on the distribution of family incomes: a nonparametric analysis,” Working Paper 0412, Federal Reserve Bank of Cleveland.

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