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The effects of minimum wage on employees

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    Minimum Wage
    Minimum wage refers to the least remuneration on a daily, hourly, or monthly basis legally paid to employees by their employers. Similarly, it is the least wage at which workers are willing to sell their labor. Minimum wages are established by the government legislation or by a contract. This implies that paying an employee below the minimum wage is illegal. Minimum wage may, however, exist without a law. Extra-legal and custom pressures from labor unions and governments may set a minimum wage, though not legally binding (Wilson, 2012). This is done through collective bargaining. Collective bargaining is the negotiations between employees and their employers seeking to establish agreements that govern working conditions. A minimum wage plays a crucial role in today business operations as it affects the ability of businesses to hire employees. The minimum wage rate legislation was first enacted in Victoria, Australia in 1894. Prior to this, there were efforts to control wages as trade unions were being decriminalized via a collective agreement during the 19th century. The minimum wage movement aimed at halting sweatshop labor to avoid or reduce industrial friction (Beman & Wolfson, 2010). Sweat shop labor involves working for a more extended number of hours in deplorable conditions for a very low pay. The minimum wage seeks to guard employees against exploitation by organizations they work for and enable them to afford the necessities of life. The supporters of minimum wages argue that it boosts living standards of the workers, reduces poverty, eliminates inequality, enhances efficiency in businesses, and boosts morale of the employees (Flinn, 2010). The minimum wage varies in different countries, provinces or states due to the unique compensation structures present in the industries. Economists have over the years strongly criticized a minimum wage rate since it constitutes a price floor for wages. The establishment of these price floors may lead to the occurrence of dead weight loss in the economy and increased possibilities of the economic inefficiencies. Companies would in such a situation prefer to hire fewer workers, resulting in unemployment especially with regard to workers with low productivity (International Labor Organization, 2010). Minimum Wage

    Economists have developed various models to help them understand the implications of setting a minimum wage on other micro-economic variables. The current studies related to this wage focus on estimating the extent to which a higher minimum wage increases the rate of unemployment (Wilson, 2012). The main interest of researchers is the examination of implication of minimum wage legislation on the length of an employee’s shifts, worker training, human resource practices, firm profits, and operational efficient and internal wage structures. Three models are used in the analysis of implications of the minimum wage legislation, namely institutional, competitive and monopsony models. Institutional Model

    The institutional model of labor markets borrows its concepts from behavioral economics. The model emphasizes that there is an imperfect competition in labor markets, that these markets are socially embedded, institutionally segmented and susceptible to over-supply (Wilson, 2012). Psycho-social aspects and factors related to technology determine operation costs and productivity in the labor market.

    Economists favor this model of a minimum wage since the adjustment of minimum wage upward may not have any employment effect in the short run (International Labor Organization, 2010). The expected response of the employers is to seek for ways of absorbing increased wages instead of laying off workers. The possible ways of absorbing costs include expansion of sales, improvement in service provision and general economic expansion (Wilson, 2012). The proponents of the institutional model believe that improving productivity and reducing organizational slack can offset costs from a minimum wage. The institutional model postulates that firms can achieve improved productivity through increased work effort, tighter human resource practices, and increased performance standards (Wilson, 2012). This model is used to predict that minimum wages may cause a ‘ripple effect’ in the structures of the internal salary. This is because firms will still strive to maintain the morale of employees with higher seniority by further increasing their wages (Fingerman, 2013). Competitive Model

    The primary components of the competitive model are a wage rate that ensures all the labor supply is consumed, and a negatively sloped demand curve. This wage rate is believed to be under no control of individual agents (Flinn, 2010). According to this model, the enactment of a minimum wage is a classical example of government distortion that has a negative implication on the labor market. The proponents of this model argue that an increase in labor supply leads to the reduction in employment due to fewer hours worked and reduced job opportunities. Some workers are, therefore, attracted into the labor market in the hope that they will earn the increased minimum wage (Wilson, 2012). In such a scenario, skilled personnel will secure employment as a demand for specialization increases. The influx of these skilled workers in the job market reduces the demand for lower-skilled workers.

    In the figure below, the labor demand curve is represented by DD, whereas the supply curve corresponds to SS. The intersection point of DD and SS indicates the competitive wage. Fixing the minimum wage at Wm leads to the reduction in employment to point Em. The distance AC represents a reduction in employment, which is smaller than the excess labor supply. The latter incorporates reduced employment (AB) and increased labor supply due to the prospects of earning higher minimum wages (BC).

    (Source: Wilson, 2012)
    A nation-wide minimum wage by the government would affect a large number of firms, although by different amounts (Wilson, 2012). The country, industry and region of operation determine the extent to which a nationwide minimum wage affects businesses. The businesses pass a higher portion of minimum wage costs to consumers or to workers and suppliers. Firms can respond to wage costs rise by reducing working hours, but maintain the number of employees in the organization. The firms may consider other options such as reduced job training, hiring less-skilled labor, and reduction of worker benefits (Fingerman, 2013). However, these measures may lead to other inefficiencies since reducing job problems and decreasing worker benefits may demotivate employees. The Monopsony Model

    A monopsony is composed of a few employers in the labor market. This guarantees these employers more market power than other firms in the competitive labor markets (Beman & Wolfson, 2010). Modern economists believe that the minimum wage model of monopsony may have different effects from other models. Barriers in the labor market related to mobility costs, hiring, turnover and research on the supply side drive the monopsony model. The primary components of this model include the discretion of employers in setting wages, and a supply of labor curve that is sloping upwards (Wilson, 2012). The curve below illustrates the monopsony model.

    W’’ is the legal minimum wage, which is higher than the monopsonic price W. The firm can hire all the workers it needs until the marginal cost of labor becomes constant and equal to W’’. The firm’s profit maximization point is A at the employment level L’’. This level is higher than the monopsonic level L. The competitive wage is higher than the minimum wage leading to involuntary unemployment, which is equal to the segment AB. The classic monopsony will exit the market in the long-run as product prices fall and profits shrink (Wilson, 2012). Economists have developed models to help them evaluate the labor markets. These models are institutional, competitive and monophony (Fomby, Bishop & Kim, 2010). The pattern emphasizes that labor markets are socially embedded, institutionally segmented and susceptible to over-supply. The competitive model rejects government intervention in the labor since it leads to negative effects in the labor market. Firms that have the monopoly power in the labor market apply the monophony model (Fingerman, 2013). On the whole, firms resort to the adoption of the three models under consideration to respond to labor market interventions depending on the region, or the country of operation. Effects of Minimum Wages

    Advantages of Minimum Wage Legislation

    A minimum wage acts as an incentive for an employee to take up a job since one has the knowledge about the minimum pay (Bonello, 2006). A simple comparison between the money got from public assistance and the minimum wage enables one to deduce the financial incentive involved in taking a job. Workers feel contented and perform efficiently when they have an ability to maintain their standards of living on the minimum wage set by the relevant authority. Incentives, in this case with regard to the minimum wage, increase productivity, and, hence high revenues. Employers are motivated to invest and develop in order to cover the costs of the increased labor. A minimum wage legislation reduces the dependence ratio. This is because employed people have the opportunities to earn minimum wages. An unemployed individual uses a higher number of public services as compared to the one who makes the least minimum wage. Unemployed people receive rent assistance, welfare, and food stamps like, for instance, in various regions of the United States (Wilson, 2012). Having a minimum wage reduces the need for public assistance. This in turn minimizes the tax obligation on the state and the community. A minimum wage makes it easy for small businesses to plan for their money through budgeting. This enables business owners to know what they are expected to pay for labor provided. It also helps the owner determine whether he or she can create new employment opportunities on the basis of the budgeting information (Berlatsky, 2012). This is the foundation for creating more job opportunities and hiring employees to assume the vacancies available.

    Hiring processes are made easier for employers and young or unskilled workers. A potential employee knows which wage to expect, and the employer does not need to negotiate it with a new employee. A fixed minimum wage for the workers ensures minimum standards of living for them. Having a minimum wage prevents companies from taking advantage of workers, especially in adverse economic times during negotiations (Formby, Bishop & Kim, 2010). The minimum wage reduces poverty since it raises the wages of the lowest paid individuals. In practice, a minimum wage plays an important role in the reduction of the gap between the rich and the poor. The minimum wage achieves this by establishing a floor in the wage difference to ensure it does not widen. This goes a long way in maintaining populations with equal freedoms. The existence of the minimum wage ascertains that the majority of families are out of the poverty level in the long term. This is because workers have the ability to service their basic needs. Fingerman (2013) argues that the possibility of minimum wage reducing the income gap is limited. This is due to the fact that companies increase the salaries of senior employees in a proportion to a minimum wage rise. Disadvantages of Minimum Wage

    Minimum wages may result in the closure of small companies since there is a difficulty in keeping up with payments of wages. This is because minimum wages increase wage costs of the production up to the point where costs exceed revenues. Companies may respond to this by incrementing prices of commodities, but the legislative price ceilings may not allow for upward price adjustments. The commodity market is highly competitive, making prices perfectly elastic (Wessels, 2006). Minimum wages have inflationary effects on the prices of goods and services. Employers tend to raise the prices of their goods when a minimum wage is fixed in order to recover from increased wage costs. The failure to sell these commodities at a profit can result in the necessity to use more expensive machinery or, eventually, a closure of a business, and, consequently, laying off some workers (Autor, Manning & Smith, 2010). Creative companies seek alternative methods of recovering from increased costs such as elevating quality and reducing employee benefits, but these actions too have long-term implications with reference to employees’ performance. This makes businesses reorganize the funds concerning either their consumers or employees and suppliers. Inflation hampers the ability of a minimum wage since money increases in nominal terms and not in real terms. When the government sets a minimum wage in selected industries or for all the industries, employers view it as the maximum amount. Senior employees fail to enjoy the way they are paid for the work they do; yet they have to agree to the amount set by the government (Bonello, 2006). This in turn eliminates the workers incentives and decreases their efficiency. An employee’s willingness to work is affected by the minimum wages when labor is deducted from unemployment benefits.

    Criticisms of Minimum Wage
    The opponents of minimum wage rates have introduce much criticism with regard to this policy (Berlatsky, 2012). The politicians to gain popularity and support on the part of the public have always used the policy of a minimum wage. One of the main characteristic traits of politicians is their rhetoric nature that equips them with excellent convincing power. Popularity is the mainstay of the politicians; thus they use all means to defend it where possible. The most powerful methods of developing and retaining this popularity is by showing the public that they are concerned with their financial needs, and are always working hard to defend their rights against exploitative employers (Fingerman, 2013). They end up promising workers that they will raise the minimum wage level in order to enable workers to overcome their financial constraints. This leads to endless conflicts between economists and politicians on the aspects of minimum wage limits. All employees would prefer the government to raise the minimum wage level since it is beneficial to them. The United States Federal government proposed adjusting its minimum wage from $7.5 to $9 (International Labor Organization, 2010). The United States President, Barrack Obama, called for this wage increase in his speech, which he addressed to the Congress on February 12, 2013. Most Democratic, Independents and half of the Republicans voted for this bill, but 27% were against such a minimum wage rate adjustment.

    Obama specified that this raise of the wage level should be achieved by the year 2015, after which it is expected to be indexed to inflation (Wilson, 2012). Gallup found that the wage rate increase was high in absolute terms, but it was a bit lower than it turned out from the previous proposals related to a minimum wage rate. Proposals for raising the minimum wage levels are typically classified as a crowd pleaser, and Obama’s intention to push the current rate to $9 from $7.25 is no exception (Berlatsky, 2012). Politicians maximize on the issue of raising minimum wages due to their quest for fame, but they fail to consider the economic consequences of putting the policy in question into action (Belman & Wolfson, 2010). These empty and inapplicable promises lead to a series of strains between employees and the government, as well as between the government and employers as each of them strive to satisfy his or her needs. The public support for boosting the minimum wage rate may be hindered by a continued high unemployment level affecting most parts of the world. This is why thoughtful members of the public criticize wage increase proposals and, as a result, raise public awareness on this subject matter. It is the responsibility of the employer to calculate the production expenses and come up with the appropriate benefits and compensation structure (Berlatsky, 2012).

    Imposing minimum wage rates on companies sometimes becomes ineffective and detrimental to the firms. The government does not understand the internal operations of the companies and their profit limits. Employees who criticize the minimum wage rates argue that employers would still cut back on workers. This would hurt the low-income earners whom the wage is designed to help. Every organization has its remuneration policies, which are designed to satisfy the employees’ needs according to regions of operation, position in the organizational structure and employee development potential. Minimum wage level alterations need to be carried out by professionals while considering the economic impacts of such increases (International Labor Organization, 2010). However, allowing firm managers to set wage rates for employees may leave room for employee exploitation. Some forms of control may be necessary, but the companies’ compensation and policies may be allowed to prevail. The main objective of minimum wage legislation proponents is to reduce poverty in a country (Formby, Bishop & Kim, 2010).

    The extent to which minimum wage levels are effective with regard to poverty reduction remains a dilemma among the economists, government officials and employers. Supporters of a minimum wage claim that it motivates workers reducing inequalities prevalent with relation to incomes, as well as it improve the standards of living and reduce poverty. This is because employers expect to receive increased incomes, which they can use to provide themselves with the basic needs, as well as save and invest. Formby, Bishop and Kim (2010) argue that the adjustment of minimum wages occurs only in nominal terms. The real terms of wages remain constant regardless of the amount of a wage rise. Critiques of the minimum wage base their arguments on the neo-classical economic theory and contend that minimum wage legislation is discriminative. Neo-classical economists argue that price floors overrate low skilled employees in comparison to what is expected of labor market forces. This requires employers to compensate these workers at higher rates than those prices found on the market. Employers consider it hard to continue paying these employees, thus reducing the quantity of the unskilled employees (Children’s Defense Fund, 2005). The most notable outcome of minimum wage rates is referred to as the “ripple effect”. Formby, Bishop and Kim (2010) describe the ripple effect as the increase in wages of all other workers because of setting minimum wages due to the need for relativity. Belman and Wolfson (2010) note that the direct results of wage floors are clearly mixed.

    The workers that are most likely to enjoy higher wages are those whose remunerations were previously closest to the minimum wage level. Minimum wage opponents argue that setting the minimum wage will adversely affect the economy since the small-scale businesses will not meet the Federal requirements of the subsequent increase in wages of all workers. Businesses that depend on unskilled labor experience dramatic increases in wage expenses. This will present challenges to the economic growth and introduce a new variable to decision-making. The inflationary implications of the minimum wage legislation cannot be overlooked (Formby, Bishop & Kim, 2010). In most cases, employers abide by the minimum wage requirements, but they respond by increasing the prices of commodities they offer. Employers cannot run their businesses with a loss. Thus, they seek ways of either reducing the costs of production or maximizing revenues. Labor costs are usually easily adjustable, but the federal institutions control them due to the fact that the only way for the company to recover from increased costs in by elevating prices (Autor, Manning & Smith, 2010). This leads to inflation, which is the worst deterrent factor to economic development. Income increases in direct proportionality to prices of basic necessities.

    The low income earners cannot still afford these basic necessities, rendering minimum wage legislation an unnecessary burden in the economy. This is worsened by the fact that minimum wage rates dampen equality in resource distribution. Many benefits of minimum wage legislation go to the higher income earners as the low-skilled workers are being made worse off. This implies that the minimum wage legislation cannot achieve its economic goals. Minimum wage legislation has been criticized by many economists and employers (Children’s Defense Fund, 2005). Politicians misuse the objectives of minimum wage legislation to gain popularity. The firms have the responsibility of setting proper remunerations for the workers. Minimum wage legislation does not guarantee poverty eradication since it reduces unemployment opportunities, increases the rate of inflation and leads to unequal distribution of incomes. Compensation Methods and Systems of Paying Performance

    Traditions do not bind the companies when it comes to compensating and motivating employees. Companies take advantage of accumulated experiences of others and internal creativity to craft improved approaches to manage compensations, which are valuable to employees. Human resource managers apply integrated methods and performance rewarding systems to ensure enhancing of employees’ satisfaction and motivation (Wessels, 2006). Modern firms that are committed to employee satisfaction seek to find all possible types of benefits that employee’s value and redesign the strategies of remuneration to meet their demands. The most common remuneration methods include performance merits, rewards and recognition, as well as exceptional retention and a temporary pay (Autor, Manning & Smith, 2010). Performance merits are concerned with the provision of bonuses for workers who perform their jobs with exceptional excellence according to a company’s specific measurable criteria. This method of rewarding employees is mostly applied in academic contexts, but it is sometimes used in corporate sectors as well. Reward and recognition method involves bonuses, recognition leave and non-monetary awards given to the workers an acknowledgement of their contributions to the overall objectives of the company. These rewards are used by the human resources management to encourage teamwork, implementation of modified business practices, special project completion, employee appreciation and exemplary efforts (Film, 2010).

    Human resources managers also promote employees who complete the acquisition of additional competencies, knowledge, skills and abilities that are outlined in the organizational learning plan. A temporary pay is a management-initiated supplementary pay added to an employee’s salary for assuming additional roles and responsibilities on an interim basis. The amount of money that a human resources manager allocates to an employee depends on a pay band that the delegate assumes. Exceptional retention or recruitment benefits are awarded in the form of sign-on bonuses, retention bonuses, projects based incentives, compensatory leave, and annual leave (Bonello, 2006). The primary methods of compensating employees include straight salary, salary plus commission, quota bonus, straight commission without advances, and straight commission with advances. The system of employee performance reward is allowing them to have some equity ownership in the company. The companies that use this system allow their employees to buy the company’s shares and enjoy the benefits accruing from the company ownership (Autor, Manning & Smith, 2010). This system motivates human resources to improve productivity and quality in order to better the performance of businesses since they have a share in the company ownership. Most business organizations consider the supplementary methods of employee compensation in motivating employees to be more appropriate than minimum wage legislation. Ways of Proper Execution of Mandated Benefits Programs

    Mandated benefit programs include unemployment compensation, social security and workers’ compensation. Most of these programs are operated by insurance companies, which guarantee employers full payment of their benefits upon retrenchment, retirement or disability. These insurance companies provide monetary payments to employees whose employment contracts have been terminated. Employment compensation is justified since it sustains consumer spending during the periods of economic recession (Formby, Bishop & Kim, 2010). Mandated benefits should be executed through a combination of federal and state taxes, which are levied upon employees during their contract period (Fingerman, 2013). The amount of money that the state deducts from an employee should be based on the amount of wages contributed by the employer, as well as the sum the employer has already contributed to the fund and the amount of compensation the discharged employees have received from the fund. The proceeds collected from employers should be deposited in the Mandated Benefits Fund, which is controlled by each state. The Federal government should allow states to extend the time during which citizens can receive benefits. States should consider providing additional unemployment benefits to disabled workers (Fingerman, 2013). This will guarantee the employees who are disabled some streams of incomes during the periods of economic readjustments. Advantages of Voluntary Benefit P-programs

    Voluntary benefit programs include health benefits, retirement, life insurance, and time-offs. The most effective modern approach to compensation and employee benefit plans is geared towards best employee recognition (Wessels, 2006). Voluntary benefits allow employees to concentrate on the production since they are guaranteed assistance in case they encounter financial, health and disability challenges. Most of the public servants prefer voluntary benefits since they assure them a regular flow of incomes upon the termination of employment contract or after retirement. During the times of sickness, health benefits bail out these employees instead of borrowing money under high interest rates. Effective voluntary benefit programs reduce employee turnover ratio, raise productivity, and has a positive impact on the bottom line. Conclusion

    Minimum wage is the least remuneration that employers pay to their employees, which is established by the central government. The minimum wage legislation was first introduced in Victoria, Australia in 1894. The main objective of the minimum wage legislation is to guard employees against the exploitative nature of employers and assure they are provided and satisfied with the basic needs. Economists criticize the minimum wage legislation due to its adverse economic consequences. Wage floors occupy a vital position in the current economy because they guarantee valuable opportunities for workers. Many people support minimum wage legislation in order to enable them to overcome their financial constraints. However, a minimum wage has other adverse micro-economic challenges. Economists use institutional, competitive and monopsony models to evaluate the implications of minimum wages on businesses’ ability to hire more employees. The imposition of a minimum wage has both positive and negative effects (Autor, Manning & Smith, 2010). The minimum wage acts as an incentive for an employee to take up a job. Firms are able to draw proper budgets for the expenditure of their money, thus facilitating adequate planning. The process of hiring workers is made easier since the prospective employer and an employee are already aware of the salaries they allocate and expect correspondingly. Minimum wage legislation may lead to the closure of small-scale companies since they may not be able to afford to pay the minimum wages. Other drawbacks of minimum wage levels include inflationary effects, a lack of guarantees to compensate exceptionally performing employees, which prevent fair distribution of income and lead to unemployment. Minimum wage legislation is criticized since it is not properly structured to achieve its intended micro-economic objectives. Economists criticize the minimum wage policy since it does not reduce poverty and is frequently abused by politicians to gain popularity for their own good. Mandated benefit programs that a company can adopt to motivate their employees include workers’ compensation, social security benefits and unemployment compensation. These programs do not have many adverse effects on microeconomics like minimum wage legislation.

    Autor, D. H., Manning, A., & Smith, C. L. (2010).The contribution of the minimum wage to U.S. wage inequality over three decades: A reassessment. Cambridge, Mass: National Bureau of Economic Research. Belman, D., & Wolfson, P. (2010). The Effect of Legislated Minimum Wage Increases on Employment and Hours: A Dynamic Analysis. Labor, 24(1), 1–25. Retrieved April 18, 2012, from ABI/INFORM Global. Berlatsky, N. (2012). The minimum wage. Detroit: Greenhaven Press. Bonello, F. J. (2006). Taking sides. Dubuque, Iowa: McGraw-Hill/Dushkin. Children’s Defense Fund (U.S.). (2005). Increasing the minimum wage: An issue of children’s well-being. Washington, D.C.: Children’s Defense Fund. Fingerman, B. (2013). Maximum Minimum Wage. Hauppauge, N.Y: Barron’s. Flinn, C. J. (2010). The minimum wage and labor market outcomes. Cambridge, Mass: MIT Press. Formby, J., Bishop, J., & Kim, H. (2010). The Redistributive Effects and Cost-Effectiveness of Increasing the Federal Minimum Wage. Public Finance Review, 38(5), 585. International Labour Organization. (2010). Global wage report 2010/11: wage policies in times of crisis. Geneva: International Labor Office. Wessels, W. J. (2006). Economics. Hauppauge, N.Y: Barron’s. Wilson, M., & Cato Institute (2012). The negative effects of minimum wage laws. Cato Institute. Retrieved from

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