The economy of a nation grows due to several factors. Economic growth is a measure of how much the economy has changed over time. Usually, this growth comes naturally. However, governments can also intervene in it through fiscal policies. A fiscal policy refers to using government spending and tax policies to influence the economy. More particularly, it impacts macroeconomic conditions.
Naturally, the economy grows due to various factors. One of these includes consumer spending. The more consumers in an economy spend on products and services, the more the economy will grow. However, that may not always be the case as other factors influence economic growth. One of the essential factors in consumer spending also includes the income of residents in a nation.
The income of residents depends on various factors. One of those factors includes wages paid to employees in that economy. Usually, wage growth occurs naturally in any economy. However, the government may also stimulate it through the minimum wage. While some people think it is good for the economy, others may disagree. Before discussing how minimum wage impacts the economy, it is crucial to study it.
What is the Minimum Wage?
The minimum wage is the limit set for the wages that employees receive. When employers pay their employees an hourly rate, it cannot go below the minimum wage limit. In other words, minimum wage represents the lowest remuneration that employers must pay their employees. This limit comes from an authoritative body, usually the government. It is the legal limit for wages paid in an economy.
The minimum wage also sets the lowest level below which employees cannot sell their labor. For the employee, it can improve the amount they receive for their work. However, the same does not apply to the employer. Employers must suffer an increased cost of labor through minimum wages. Therefore, most businesses and companies are against a higher minimum wage limit.
The minimum wage limit applies to hourly payments made by an employer to an employee for their work. Usually, this limit comes from federal law. However, state laws may increase that limit within that jurisdiction. The minimum wage limit applies to workers that satisfy the criteria for employment. However, there may be some exceptions to the rule. Therefore, it does not apply to exempt labor.
Primarily, the minimum wage acts as a protection to save workers from exploitation. Similarly, it prevents employers from paying their workers unreasonably low compensation. Minimum wages help provide enough to enable workers to support their standard of living. Essentially, it can reduce inequality and poverty in an economy. Despite that, many people oppose setting a minimum wage limit for labor.
What are the advantages of raising the Minimum Wage?
Supporters of raising the minimum wage have various reasons why it is crucial. Many countries have increased their minimum wage and experienced a positive outcome. However, the results have not also been as instantaneous. Those results may prevail later through the stimulation of the economy. Nonetheless, some of the advantages of raising the minimum wage include the following.
Improves standard of living
Standard of living is an economic concept that focuses on material factors. It represents the quantity and quality of material goods and services available to the given population. Supports of minimum wage argue that minimum wage increases the standard of living in an economy. Essentially, they say that it provides them with a better income level to maintain their cost of living.
As mentioned above, one of the crucial factors for economic growth is consumer spending. The more consumers spend in an economy, the more they will stimulate it. However, they must have an appropriate income to support their spending. The minimum wage helps increase that income. Therefore, it promotes higher spending by consumers. Consequently, it stimulates economic growth in the nation.
Higher employee satisfaction and motivation
The minimum wage also increases employee satisfaction and motivation within an economy. The higher the wages employees receive, the more they will be happy. Similarly, they will also have better motivation to work for an employer. It can improve labor productivity, an essential part of wage growth. This way, it stimulates the economy and contributes to economic growth.
What are the disadvantages of raising the Minimum Wage?
Despite the many advantages of raising minimum wages, many people are still against it. On top of that, employers will always try to decrease their costs. Therefore, minimum wages constitute a limiting factor for them in that goal. Apart from that, raising the minimum wage can also impact the economy adversely. Overall, some of the primary disadvantages of raising the minimum wage include the following.
Restricts employers when setting wages
One of the primary disadvantages of the minimum wage limit is restricting employers. Employers are not free to set wages according to market forces prevalent in the economy. Instead, they must stick to the limit set for them by the government. Even when productivity levels are low, they must pay a minimum wage. If they fail to do so, they face penalties and other legal charges.
Causes job losses
Some employers cannot afford to pay labor at a high rate. The minimum wage limit exposes those employers. As mentioned above, employers always try to keep their costs low. However, the minimum wage limit does not support that goal. In some cases, employers may be going through an economic downturn. In these cases, they must fire employees to compensate for lower business.
Increases outsourcing to foreign countries
When employers can’t afford a minimum wage, they will look for cheaper alternatives. One of these comes through outsourcing functions to foreign countries. Usually, employers shift their whole departments to the outsourced location. Consequently, existing employees can lose jobs. On top of that, this process stimulates the economy of the foreign company where labor is more affordable.
Is raising the Minimum Wage Good or Bad for the Economy?
Increasing the minimum wage is one of the fiscal policies used by governments to stimulate the economy. However, it can have its advantages and disadvantages, as discussed above. Despite the benefits and drawbacks, it is not always apparent how it will affect the economy.
Some nations have used minimum wages to stimulate their economies successfully. However, it has also backfired for some others.
Raising the minimum wage is good when the economy suffers and requires stimulation. Governments can use it to promote increased consumer spending. On top of that, it can also impact labor productivity positively, which can further help the economy. The minimum wage also protects the employees in an economy. Governments can use it to ensure equality within the nation.
However, raising the minimum wage is also bad when the economy is stable. On top of that, it can harm employers who are also a part of the economy. Raising the minimum wage can increase unemployment and reduce production levels. Consequently, it can signal an economic recession. Employers will always prefer cheaper labor and transfer their business to other countries.
Overall, the minimum wage can be good and bad depending on various factors. Governments must consider the needs of all parties involved at the same time. While raising minimum wages can help employees, it can be detrimental to employers. Since both parties contribute to the economy, the minimum wage limit impacts the economy both ways. Nonetheless, governments must decide when to raise the minimum wage.
Minimum wage refers to the floor limit for the hourly rate paid by employers. This topic has been an area of high interest for many people. While raising the minimum wage can have its advantages, it also comes with some disadvantages. Governments must consider both factors before deciding whether to increase the minimum wage limit. Therefore, raising the minimum wage can be good or bad for the economy based on the circumstances.