Employment and Poverty Effects of the Minimum Wage
Minimum wage, the minimum amount of compensation that an employee must receive for performing labor, is regulated by the government and guarantees minimum living standards. At the beginning of 20th century, the policy of minimum wage was first introduced in New Zealand and Australia. Nowadays, about 80% of countries around the world have implemented the minimum wage initiative in order to guarantee basic cost of living allowances for employees (Sabia & Burkhauser).
Despite the prevalence of practice, there is no consensus on the effects of minimum wage on economic development. Proponents consider it an effective anti-poverty tool (Sabia & Burkhauser). It also builds an economy where performance enhances through employees’ ongoing development. Paul Krugman, professor of economics at Princeton University and op-ed writer at the New York Times, argues that maintaining minimum wage is required for economic growth through greater employees’ involvement. Krugman states that an increase in minimum wage, specifically President Obama’s “call for a rise in the minimum wage from $7.25 an hour to $9, with subsequent increases in line with inflation,” would be beneficial for the majority of workers and good economic policy.
Opponents of minimum wage suggest that it generates poverty. This idea prevails in Neumark & Washer who note that there is little effect of minimum wage on employment. The experts further note that increases in minimum wage will likely result in net income losses for poor families. Similar suggestions are found in MaCurdy. According to him, “an increase in the national minimum wage produces a value-added tax effect on consumer prices that is more regressive than a typical sales tax and allocates benefits as higher earning nearly evenly across the income distribution” (497). It means that the view of increases in minimum wage as an anti-poverty strategy is erroneous.
This study relies on the information about minimum wage and unemployment rate in the period between 2000 and 2015 obtained mainly from the U.S. Department of Labor. It uses the data to examine the relationship between the minimum wage (IV) and employment rate (DV). In order to decide whether the relationship between the two variables is positive or negative, the study refers to covariance. Using the formula of variance, , the covariance between minimum wage and unemployment rate and also the covariance between minimum wage and poverty rate can be calculated. Then using scatter charts to plot each two variables, setting minimum wage as independent variable and unemployment rate and poverty rate in each case as dependent variable, the relationship between minimum wage and unemployment rate can be shown visually. It is evident that despite the conventional thinking, minimum wage does not address the problem of poverty. Other way round, it aggravates the problem through increases in the unemployment rate. A detailed analysis of this inverse relationship is considered further in this report.
The legislative control of minimum wage is evident in many countries around the world. However, in industrialized nations such as the United States, minimum wage sometimes merely …