Minimum Wage Effects on Economies

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Income inequality remains to be one of the key challenges to the attainment of economic development in the United States, other developed economies, the emerging economics, and the underdeveloped economies. More often than not, the issue of minimum wage has come out strongly in economic forums that are meant to aid in promoting welfare and economic growth. According to Wilson (1), the United States Federal Government has imposed minimum wages from the year 1938. Also, most states in the United States have their own laws that govern the setting of minimum wages.

However, the question that remains concerning minimum wage is why it has remained hard to promote the economic welfare of the low income earners in the economy, in spite of increasing their income. A minimum wage favors people who have low incomes through setting the salary scale for employers. The present United States government has proposed a rise in minimum wage to 24 percent (USA Today para 2). With the minimum wage having been pushed up in the United States but income inequality remaining to be a chronic challenge, it is vital for economists to focus on other modalities of promoting welfare and reducing the inequality gap.

This paper presents two perspectives to the issue of minimum wage in economies. The first part of the paper presents criticism on the issue of minimum wage by providing supportive evidence from research. The second perspective is that a minimum wage is vital for reducing income inequality and promoting economic growth. This acts as a counter criticism on the first perspective presented in the first part.

Supporting the position

The first thing to note is that minimum wage suggestions are used as a modality for reducing the income gap in the United States and other countries in the world. This approach has proven unworkable in the United States, in spite of the continued push for an increase in the minimum wage and the packages that have been offered over many years. Broader and more aggressive tactics have to be developed to help in attaining a vital basis on which the problem of income inequality can be addressed (USA Today para 3). People who lie in the lower class are often faced with difficulties when it comes to changes in economic conditions, like changes in production patterns. This results in heightened levels of inflation and financial strain on the side of the consumers.

Therefore, implementation of social and economic reforms can play a critical role in promoting the economic welfare of all people in the economy. Some of the necessary reforms include increasing investment in education by providing equal opportunities for both the rich and the poor and development of socioeconomic reform frameworks that allow people in lower economic ranks to increase their income base. Bridging the gap between the poor and the rich is quite hard. The rationale behind this is that the rich own most of the production institutions in the society. This enables the rich to establish economic controls that assure them of benefits. Therefore, the minimum wage concept often fails to meet the intended economic goals.

The rich, who own the means and resources for production often, find a way of passing labor costs to consumers. These consumers comprise of people from households with low incomes. This implies that the supposed positive impact of the minimum wage as encrypted in the labor laws can be hardly realized (Soltas para. 7). Therefore, the only way through which the poor can become influential and reduce the gap in income is through the ownership of alternative ventures. Besides aiding in increasing the income of people who are in the low economic class, these ventures can also help in exerting competitive pressure on the large business ventures. This forces them to improve on what they offer to their employees and offering goods at affordable prices.

Another observation that has been widely made is that continued increment in the minimum wage has an ambiguous effect on economic growth. There is substantial increase in levels of consumption for households with low income when a minimum wage is raised substantially. In other words, it can be argued that incremental upward adjustments to the minimum wage results in a consumerism culture.

People with high incomes save more than people from households with low income. This enables people with high incomes spend massively on certain causes. Therefore, increasing the wages of the people in the lower economic rank necessitates a shift in the patterns of expenditure due to income redistribution when both the rich and the poor spend. In this case, the rate of consumption goes higher to the point where it surpasses the rate of production and wealth creation in an economy. Therefore, the probability of an economy to grow is quite low (Soltas para. 4).

Lemos (397) conducted a study in Brazil to determine the effect of minimum wage on macroeconomic indicators: employment, prices, and wages in the country. She found out that the minimum wage only works in situations where there are low inflation rates in the economy. Moreover, the impact of increasing the minimum wage under inflationary pressure is not sustainable, although it helps in raising wages. However, the rise in wages is offset by the increase in prices of goods and services due to increased circulation of hard cash in the economy. Under higher inflation rates, the potential to eliminate poverty, which is often embedded in the set rates of minimum wage, only lasts for a short time. In this case, the impact on wage rates is quite volatile. This results in layoffs and increased prices, as well as high inflation.

According to Wilson (1), the minimum wage laws are in most cases one sided. Businesses are not given consideration when crafting the laws. The laws only focus on the welfare of the workers by making provisions that force businesses to increase the wages that are paid to workers. The assumptions that companies make adjustment costs that are necessitated by a minimum wage through reduced profit are misguided. Wilson noted that the costs are offset through four main undertakings, which in the true sense have a negative effect on the welfare of the employees and the growth of economies. These are undertakings are: Reduction of the benefits for employees, reducing the rate of hiring, adjustments of employee working hours, mostly on the upper side, and increment in the prices of commodities (Leif 227).

As far as sustaining the workers is concerned, some firms may opt to substitute the highly skilled employees with the less skilled employees to sustain salaries. In other cases, some firms choose to substitute the less skilled employees who earn minimum wages with highly skilled employees who can multitask, or mechanization of functions. This results in joblessness for the less skilled employees.

When confronted with these decisions, governments rationalize their decisions by arguing that they can hardly sustain the operations if they do not do this and this would lead to a possible shutdown. Governments do not prefer the shutdown of any firm as this could result in massive job losses and the subsequent shrink in the economy. The implication here is that firms have a big say in the internal decisions that they take because of the position that they occupy in the economy (Wilson 2).

The last argument concerns the structure of the market. The United States, together with many other countries in the world, embraces an open economy where market forces play a critical role in ensuring sustainability of the market. A minimum wage is not desirable in a free market since it defeats the essence of having a free labor market. It should be known that most markets are moving away from monopsony and are embracing the competitive model.

This means that the attributes of competition in the United States market are immensely impaired. This is causing disruptions in labor demand and supply and weakening the economy (Wilson 2 and Leif 224). Malpractices in the US labor industry, like hiring of immigrants at the expense of the qualified employees, are some of the effects of the minimum wage (Epstein and Heizler 197). According to Carrden (para. 8), the minimum wages result in thoughts that are uneconomic in nature in the economic policy arena. This hurts the economy.

Argument against the position

According to the Organization for Economic Co-operation and Development, it is critical to increase the income for the poor. This is one of the mechanisms of bridging the economic inequality gap in the United States’ economy and other developing economies across the globe (Soltas para. 3). Research has ascertained that there is a significant empirical effect of enforcing a minimum wage economy, especially on income inequality. The enforcement of minimum wage laws enables transition of employees from lower income groups to higher income groups. This, in turn, enables low income groups to save and enhances their potential to invest and better their incomes.

Lemos (67) observed that the wide cost shock on industries, which is caused by the increment in the minimum wage, often results in higher prices. In most cases, the production rates of industries are maintained, but industries often seek to pass the costs to the consumers to offset the cost. The consumers who bear this brunt include people with high incomes and those with low incomes. In most cases, an increase in prices results in the cut down of expenditure by people with low incomes. Also, the percentage increase in price is quite low compared to the rates of increment on the minimum wage in the United States. Therefore, the potential for people with low incomes to save still prevails even amidst the rise in prices. On the other hand, the potential to save is also offset by the increment in wages (Lemos 68).

The other point to note is that there is no direct evidence linking a higher minimum wage to the creation of unemployment in the US economy (Weller and Bunker, para. 3). Through development of clear economic policies, companies can easily absorb the increase in the minimum wage through smaller increments in prices, as well as embracing smaller reductions in the high profits that are made by most companies. What has been observed in the US economy is that most companies seek for channels through which they can reduce costs as they aim to make higher profits at the expense of the people who work for the companies.

A proper enforcement of the minimum wage law can help in curbing this behavior by making companies strike a balance between the welfare of the workers and the profits that they make. The calculation made by the Center for American Progress shows that prices are bound to increase in a modest way, while profits would reduce in a minimal way if the minimum wage is increased as suggested by President Obama. This is opposed to the blanket view by most economists that prices are bound to rise when the minimum wage is increased. In addition to this, there will be other gains by businesses. These gains can help in limiting costs incurred. For instance, there can be reduced labor turnover, increase in employee output and increase in customer base (Weller and Bunker para. 8).


From the argument presented in the paper, it is evident that implementation of the minimum wage, especially the increment in the minimum wage, induces negative forces on the macroeconomic elements in the economy. This lowers the state of welfare in the economy. Therefore, addressing the issue of poverty and inequality requires enforcement of effective policies that can guide the establishment of socioeconomic programs for people who are in the low income class. This would replace the implementation of a minimum wage since a minimum wage results in a negative effect on the economy.

Works Cited

Carden, Art. “Should We Care About the Minimum Wage?”. Forbes. 2011. Web.

Epstein, Gil S., and Heizler Odelia. “Illegal Migration, Enforcement and Minimum Wage.” Center for Research and Analysis of Migration. 2007. Web.

Leif, Danziger. “Endogenous Monopsony and the Perverse Effect of the Minimum Wage in Small Firms.” Labor Economics 17.1 (2010): 224-229. Print.

Leif, Danziger. “Noncompliance and the Effects of the Minimum Wage on Hours and Welfare in Competitive Labor Markets,” Labor Economics 16.6 (2009): 625-630. Print.

Lemos, Sara. “Do Minimum Wage Price Effects Hurt The Poor More?” Económica, La Plata 50.1-2 (2004): 67-83. Print.

Lemos, Sara. “Minimum Wage Effects on Wages, Employment and Prices in Brazil.” In Solomon W. Polachek, Olivier Bargain (ed.) Aspects of Worker Well-Being (Research in Labor Economics, Volume 26). England, UK: Emerald Group Publishing Limited, (2007): pp. 397-413. Print.

Soltas, Evan. “Two Reasons Not to Raise the Minimum Wage.” Bloomberg. 2013. Web.

USA Today. Raising Minimum Wage by 24%? Not Now: Our View. 2012. Web.

Weller, Christian E., and Bunker Nick. “A Higher Minimum Wage Will Not Hurt U.S. Businesses”. Center for American Progress. 2013. Web.

Wilson, Mark. “The Negative Effects of Minimum Wage Laws”. Policy Analysis. No. 701, CATO Institute. 2012. Web.

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