A minimum wage refers to the lowest amount of compensation that is paid to an employee for performing labour. Minimum wages are established typically by contract or through government legislation and thus it protects employees from exploitation. The increase in minimum wages creates a loss in the labour market that is a loss of opportunity which is seen in increased unemployment, referred to as the structural unemployment. The impact of the increase of minimum wage always causes a controversy in political as well as in management circles. Although the number of the supporters of the regular minimum wage increases, the hitted discussions about the necessity of these raises as the means of keeping workers from falling below the poverty line is still taking place. These increases actually prevent the less qualified people from entering the labor pool simply because their employers cannot afford to hire them anymore. Increasing minimum wage thus hurts unemployment rates in such a way that some companies, especially those with small businesses, will less likely hire workers if the minimum wage is high enough. Companies may opt for work with a small number of staff members, instead of taking a financial hit in running the business at full capacity, since the costs of hiring untrained workers is higher.
Secondly, raising the minimum wage influences prices. If companies are forced to pay more to employ workers, the budgets are affected as well. To help this, prices will go up as one way of retaining the money spent to provide additional compensation to the minimum wage employees. Businesses, such as restaurants, shopping malls and fast food places for instance, will pass these costs on to consumers through the increases in prices and so the consumers end up paying for the cost increases. Companies are forced to either lose their money or risk unsatisfied customers by raising prices, which will ultimately mean lowering profits either way. If a business manages to keep up in terms of financial matters, it is then the customers who suffer and if it fails, the workers are to suffer (Demand Media, Inc.).
The increase in the minimum wage will also reduce the level of services, thus hurting customers. This is because the company ends up hiring a smaller number of employees. In addition to this, those workers who retain their jobs are often less happy since they are forced to work much harder for little attractive incentive pay. It is therefore a lose-lose-lose situation even to those who keep their work (Swinkels & Kadan).
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Rise in minimum wage makes it more difficult for inexperienced workers to gain more valuable labor market experiences and also makes it harder for them to gain on-the- job trainings that would increase their productivity as well as their future pay (Forbes). Unskilled workers become less attractive with high minimum wages because they produce little per hour and as a result, their hiring will divert more senior staffs to training and supervision of unskilled workers instead of taking part in revenue producing activities.
Firms will only make investments in human capital only if they expect a return on the investment. High minimum wages therefore encourages firms and companies to hire workers who are already trained and experienced. This in turn eliminates opportunities for training and experience to inexperienced people and therefore it puts a bigger burden of training unskilled workers on vocational schools.
Higher minimum wages also causes more competition which can in turn mitigate some its adverse effects (Forbes). If companies are forced to raise prices, they will try and find ways of improving their products or services in order for them to survive. That does not make the mandate a sound economic policy since it will benefit foreign competitors who are not directly affected by the price mandates.
In conclusion, the raise in the minimum wage causes both inflation and unemployment. It, thus, has low impact because it accomplishes little in terms of reducing porvety. This is because the population of people under minimum wage employment is relatively small as compared to other working force members. Thus, the only certain group of individuals will benefit from the change. In addition, raising minimum wages does nothing to unemployed people.
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