In theory when an increase in minimum wage increases the cost of low-wage workers firms should want to hire less workers, however in reality this basic theory might be wrong according to Plumer B. (2013) While some studies found a link between higher minimum wage and higher unemployment level many others such as a recent paper from U.C. Berkeley that exploited differences across state borders did not find a link between higher minimum wage and higher unemployment.
A study by John Schmitt of the Center for Economic and Policy Research explores the other possible reasons a modest increase in the minimum wage may not significantly impact employment levels. According to his study instead of hiring less workers the labor markets can respond in the following ways:
• Employers can decrease benefits, hours or training.
• Employers can decrease wages for more experienced workers by delay or limit pay raises or bonuses.
• Employers can become more efficient.
• Companies can raise their prices of their products or services.
• Companies can just settle for fewer profits by absorbing the increase labor cost.
• Companies can save on labor cost, as a result there is less employee turnover.
• Workers can respond by voluntarily working harder.
Schmitt concludes that how individual firms react to the increase depends on a complex set of circumstances that economists cannot fully capture or explain and this could explain why economists often have trouble establishing a clear link between a higher minimum wage and higher unemployment.
Minimum wage was established under the Fair Labor Standards Act of 1938. Overall, the minimum wage was established to help alleviate the standard of living of low-skilled workers, whether the minimum wage truly achieves this goal is still debated among supporters and critics despite decades of economic research. Individuals who support the implementation of the minimum wage insist that it indeed increases the standard of living of low-skilled workers which in turn reduces inequality and poverty among low-skilled workers. Supporters also insist that the implementation also compels businesses to perform more effective and efficient. However, the critics believe that the implementation of minimum wage does not help neither low-skilled workers nor the businesses, instead they believe minimum wage increases poverty, inequality and unemployment especially for low-skilled workers.
The minimum wage law dictates that hourly wages cannot be reduce below minimum wage and overtime must be paid to workers who work extra hours. The law also includes restrictions on the use of child labor. Minimum wage was initially set at $0.25 per hour, however the rate has increased over the years. The current stipulated minimum wage is $7.25 per hour which could be increased in 2014 to $10.10 per hour if approved by congress. Currently nineteen states have implemented minimum wage above $7.25 per hour. While many might be impressed by the...