Economics Paper on Minimum Wage Increase in California

Minimum Wage Increase in California

            The issue of a minimum wage increase has been intensely debated ever since it was first proposed in early 2014. Even though many erudite labor market economists foresaw a significant reduction in employment of teenagers and low income earners after an increase in the minimum wages, David Card and Allan Krueger differed with such sentiments (Dube, Lester, & Reich, 2016). In fact, both Card and Krueger who drew on their own research argued that the recent modest increases in the minimum wage had no significantly adverse effect on employment (Neumark & Wascher, 2008). A detailed look into the merits and demerits of this move thus follows.

California as a state first passed its minimum wage law in the year 1913, setting the rate at $0.16/hr, and has been known to always have a higher minimum wage compared to the rest of the states in America. In the year 1938, California set its own minimum wage from $0.16/hr to $0.25/hr. Between 1947 to 1949 California’s rate of minimum wage was 62.58% above the federal minimum wage rate (Neumark & Wascher, 2008). In January 2016, California’s minimum wage was increased from its former $9.25 to $10 per hour.  Today, the 2016 minimum wage value has shot unprecedentedly to $10.50 per hour, thereby marking a $0.50 increase (Dube et al., 2016). The minimum wage in California is predicted to further hike to higher levels than the set minimum wage of any American state or country in the world. Indeed, the minimum wage continues to be a controversial subject among policymakers and economists who hold differing sentiments on the unprecedented increase in California’s minimum wage. Although policymakers would insinuate a broad array of benefits, economists differ with their ideologies as an increase in the minimum wage would have to be compensated by reducing the workforce.

The implications of a minimum wage increase are evident to Californian citizens many of whom have sadly ended up losing their jobs. However the benefits of a minimum wage increase basically apply to the smaller proportion of employees, most of whom are professional and skilled in their job categories. Those who get to feel the pinch are low income earners most of whom are less skilled and uneducated. A large percentage of these casual laborers are youths and teenagers (Dube et al., 2016). Thus, an increase in minimum wage would adversely affect their employment chances as many would get deployed or dismissed by their employers who would find it daunting to pay higher wages to a relatively large group of less skilled youths.  Most people who are currently employed in low paying industries are at risk of losing their source of income if the set minimum wage continues to rise to levels that are unbearable for the different wage paying industries and companies. The reason being, an increase in payroll costs would only be counteracted or settled by the employers reducing their employee turnover whilst encouraging more consumer spending.  Furthermore, low wage companies tend to employ more workers if the earnings created by their labor exceed the cost of employing them. This would make it extremely difficult for these hapless youths to get casual jobs as the companies would no longer afford to pay them the minimum wage as instructed by the courts. Employers are in effect required to raise their employees’ minimum wages by approximately 25% so as to fully adhere to the new mandate (MaCurdy, 2015).

In essence, the vast majority of companies would be forced to react to the newly amended minimum wage salaries by retrenching some of its employees, investing in labor-saving technology or raising the prices of its products and services due to the expected rise in the cost of production. It is for this profound reason that most of the companies would opt to purchase a machine that would do about what is equivalent to that which had been done by an employee. In the current state of highly advanced technologies, most companies would not think twice in replacing costly human labor with a technologically enhanced device or machine.

In addition, inflation may also increase as a consequence of a minimum wage increase. This often happens when a company decides to retain all its employees even after the legalization of the newly increased minimum wages. This therefore means that the cost of production for any given company will increase specifically due to the rise in the cost of labor so, in a bid to avoid massive losses, the company would increase the price of their products or services. This would in turn result in high inflation rates as companies would charge more for their products leading to each citizen having to spend more on products most of which are basic in nature. Therefore an increase in the minimum wage would be cancelled out by high inflation rates and as a result the government may be forced to impose high taxation rates on its citizens (Dube et al., 2016). Therefore, the level of consumer demand is likely to decrease after an increase in both taxation rates and product price. This may consequently force the company to deploy some of its employees with the intent of avoiding tremendous losses. In worse case scenarios, the company may be forced to outsource employees from other countries so as to maintain its preferred low cost of labor (MaCurdy, 2015).

Aside from a plethora of demerits caused by an increase in the minimum wage, there are also a number of benefits that are associated with the wage increase. First and foremost, an increase would alleviate a certain percentage of the population from poverty. Approximately 3 out of 10 families would be able to evade a long-lasting state of poverty (Dube et al., 2016). Furthermore, families that are struggling with California’s harsh economic times would no longer have to do so after the newly amended and increased minimum wage bill (MaCurdy, 2015). In addition, an increase in the minimum wage will lead to a reduction in income inequalities that were formerly created when a few of the citizens would earn very high wages in comparison to the less skilled employees who earned dismal wages. A higher minimum wage would also enable the government to reduce its annual spending as most Americans would no longer depend on government assistance programs (Neumark & Wascher, 2008). To add to this, most employees would be motivated to work harder so as to attain the company’s goals and objectives. This would eventually help the company to attain maximum productivity resulting in a decline in employee turnover rates and absenteeism.

In conclusion, the benefits of an increase in minimum wage would tend to be outweighed by a plethora of demerits that are associated with high minimum wages. Teenagers, youths and employees working in low wage industries are likely to be negatively affected by the move of increasing the minimum wage. Low income earners and each and every consumer would also be affected by the increased cost of products and high taxation rates (MaCurdy, 2015). The government is expected to gain from an increased minimum wage as it will gain more revenue as well as reduce its spending on poverty reduction programs. In the long run, the benefits of an increase in minimum wage would be canceled out by its demerits (Dube et al., 2016).

 

 

 

References

Dube, A., Lester, T. W., & Reich, M. (2016). Minimum wage shocks, employment flows, and labor market frictions. Journal of Labor Economics, 34(3), 663-704.

MaCurdy, T. (2015). How effective is the minimum wage at supporting the poor? Journal of Political Economy, 123(2), 497-545.

Neumark, D., & Wascher, W. L. (2008). Minimum wages. Cambridge, Mass: MIT Press.