Jul 9, 2013

How Does Minimum Wage Change Employment?

Policy, politics, rhetoric…. All of these things sound great on the outside but are in fact extremely complicated. There are economists and people much smarter than the rest of us that can explain this in simpler terms than I can. I will cover the pros and cons. If you don’t like what I have spent 20 minutes writing, then research your own (which everyone should anyways).
Ok. First I need to be clear that I wish people, in general, didn’t suffer and provided for themselves. People need help with this, since the last few generations did not teach such aspects to their children were left with a different mentality. Second, I believe that people should provide for themselves and be taught how to climb that economic “ladder” (gain higher income as they progress through life). Third, I also believe that when you start out at something, you need to start out small. Fourth, increasing the wage would certainly help those that get hired but there will fewer or them actually getting hired…leaving them unemployed.
Suppose you had a business and wanted a little grunt-work (cleaning, customer service, etc;) or something that did not require skills or experience. The perfect candidate? A high school student or recent graduate of. Why? Because they typically have Zero skills and Zero experience. It would be your choice to pay them whatever you want, but the value of their labor (very minimal, at best) in the beginning is fairly small.
Later on, their skills will increase, as they age. They not only gain experience in that field of work but they also gain even more valuable traits, such as discipline, work ethic, communication skills and other technical skills (like computers, radio communication, faxing, tools, etc;) which are invaluable for life and work, in general. If you start paying people at a higher wage, without them gaining experience and skills first, they will not progress. Also, as a business owner would NOT want to hire them for 12 bucks an hour, much less 9 dollars an hour, if they’re only 17 and are hardly a benefit to your company.
Now let’s say that this 15-19 year old works at a low wage for a few years during high school (at a retail store or wherever) and then moves on with life after college for a career, they will have something great on their resume: stable work experience and skills!
……….In short, raising minimum wage will benefit those already hired and even less to be hired in the future. Businesses simply cannot (or will not) afford to hire people (most cannot, especially now) who have a low skill-set and a lack of experience, at a higher wage.
This is important…Minimum wage is not a “livable” because that is not what it’s intended for. It’s a starting pay for those who have no experience and no skills. However, those that DO get hired with this wage (who have low skills and low education) will certainly benefit from the extra 100 bucks per month (that’s even if they enough hours). 7 dollars an hour for 20 hours a week for a whole month (with 23% tax rate with federal, state and SS accounted) for would equal to $431.20 per month. Raising the minimum wage will increase that to $554.40 per month, which would be pretty sweet if you were in high school. Think of all the cell phone and car payments a young college student could spend with that?  LOL. Or clothes, food, help parents out, etc; That’s over a hundred bucks per month, which is pretty sweet, in my opinion (at that age). The problem is that the business does not, and will never, see that the young high school/college student’s labor actually worth that much.
**I must note that it is very unfortunate how many people are on minimum wage because of their low skill set and low education….. and even more unfortunate when they move out of their parent’s house, get a cell phone and rack up debt from rent, utilities, etc; And it’s also bad when someone has worked for most of their lives and gained a decent income, then were laid off, and now can only get a job for minimum wage**
Now, having that extra few hundred bucks per month is GREAT for the local economy. They have more spending money. The problem, once again, is that the businesses in the area will simply not hire the majority of those that have these low skills and less education.
Raising the minimum wage would certainly help people afford more things but there would be fewer people who actually get hired as a result.
There is, however, a major problem with alleviating this issue: poverty. Which is part of the goal with raising wages except that it hardly works and in fact makes it worse for those with the low skills, etc;
Generalizing here, the millennial generation severely lacks this. We want the entitlements, the paychecks, the benefits, perks, and we want others to pay for them.
To put this in a perspective, we should look at some extremes because simply would never happen. What if the minimum wage increased to 17 dollars an hour. Would the mom and pop shops be able to hire a few college-aged adults or high school students effectively? No. Especially if their skills set is low. They could hire 3, if the minimum wage was below7 bucks an hours, though. Because they could increase their productivity having three hands instead of just one (that’s clearly overpaid). Now, this is only an example of an extreme in one tiny situation.
If you multiplied a less extreme example (from 7 to 9 bucks an hour, and multiplied that by several millions of teenagers and young adults (even older adults!) that are already looking for minimum wage jobs, then you have a grand scale of unemployment.
Also, with the recent increase in corporate taxation, healthcare taxation, payroll taxation, rich people tax (you know, the ones that higher lower skilled people), taxation on dividends and capital gains, taxation on business investments in general….its no ****ing wonder why businesses do not, cannot and will not hire people (at least hire at a faster rate than they are now).

Here are some links with pros and cons.

Cons:

Both:

Peer-reviewed literature:
1. A little dated but still relevant: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2205309 (click on “Download This Paper” and you get the pdf format).


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