Issues and Research Questions

This study aims to provide answers to the following issues and research questions.

1. What are the positive effects of minimum wage law to labour productivity?

2. Does minimum wage law reduces poverty?

3. How does minimum wage law affects the economy of a country?

4. What are the positive effects of minimum wage law to employment?

5. How does minimum wage law affect small businesses?

 Analysis

Positive effects of minimum wage law to labour productivity

Recent studies have shown that minimum wages not only help to reduce wage
dispersion and to channel productivity gains into higher wages, but they also can contribute to
higher labour productivity – both at the enterprise level and at the aggregate economy-wide
level.

At the enterprise level, workers may be motivated to work harder. Various studies have
supported the hypothesis that first by Akerlof in 1982 that employees consistently provide
higher effort levels in response to higher wages, the so-called “efficiency wage” theory.
Workers may also stay longer with their employer, gaining valuable experience and
encouraging employers and employee to engage in productivity-enhancing training. Dube,
Lester and Reich (2012) attribute reduced turnover for restaurant workers in California to the
effect of the minimum wage, which reduces wage competition between low-paying enterprises.
When employers can better retain their workforce, workers can learn on the job and be
trained to become more productivity over time.

Researchers have pointed out that productivity increases may be the result of a fall in
employment due to the minimum wage, as enterprises substitute capital for labour and adopt
more capital-intensive production technologies. While this remains a distinct possibility,
particularly when the minimum wage is set too high, other research shows that productivity
increases in enterprises were the result of organisational change, training and efficiency wage
responses to increased labour costs from minimum wages.

At the aggregate level, minimum wages can result in more productive firms replacing
least productive ones – and surviving firms becoming more efficient. These mechanisms can
increase overall economy-wide productivity. In China, for example, it has been observed that
higher city-level minimum wages resulted in lower survival probability of low-productive firms.
There was no negative employment effect, however, because employment and productivity
increased in surviving firms. Hence the minimum wage may have allowed more productive
firms to replace the least productive firms, and forced incumbent firms to strengthen their
competitiveness.

Minimum wage law reduces poverty

Raising the minimum wage in developing countries could increase or decrease poverty,
depending on labor market characteristics. Minimum wages target formal sector workers—a
minority in most developing countries—many of whom do not live in poor households.
Whether raising minimum wages reduces poverty depends not only on whether formal sector
workers lose jobs as a result, but also on whether low-wage workers live in poor households,
how widely minimum wages are enforced, how minimum wages affect informal workers, and
whether social safety nets are in place.

If job losses in the formal sector are small, raising the minimum wage is likely to reduce
poverty. If informal sector wages rise when the minimum wage increases, higher minimum
wages are likely to reduce poverty. If the people earning the minimum wage are heads of low-
income households, higher minimum wages are likely to reduce poverty. If low-income workers
lose jobs and cannot find jobs because of a higher minimum wage, social safety nets for low-
income households can protect against increased poverty.

Based on Wendy (2007), raising the minimum wage reduces poverty in most developing
countries. But the impact is modest because the minimum wage applies to only a minority of
poor workers; in particular, it does not cover workers in the large informal sectors. And raising
the minimum wage creates losers as well as winners among poor households—depending on
employment effects, the wage distribution, and effects on the household head—pulling some
out of poverty while pushing others in. Raising the minimum wage could be part of a
comprehensive poverty-reduction package but should not be the only, or even the main, tool to
reduce poverty.

According to the book of Wendy (2007) entitled “Minimum Wages and Social Policy”, a
popular and compelling argument in favor of raising legal minimum wages is that higher
minimum wages will reduce poverty. Quite simply: putting more money into the pockets of
low-income workers will allow them to purchase more of the basic goods and services needed
to survive. In theory, if the wage increase is large enough, poor people’s incomes will rise, lifting
them out of poverty. Most empirical studies of the impact of minimum wages on poverty in
developing countries conclude that increases in minimum wages reduce poverty, on balance,
though they find only a modest impact—for two reasons. First, a large share of workers is not
covered by minimum wage legislation. Second, higher minimum wages do not affect all low-
income households the same way: minimum wages pull some households out of poverty, but
may push others into poverty.

Minimum wage law affects the economy of a country

Minimum wage boosts the economy. Raising the minimum wage does not kill jobs.
Leading economists have found that increases in the minimum wage have no discernible effect
on employment, including employment in high-impact sectors like restaurants and retail.
Recent experience in cities that have raised their minimum wages provides further support. San
Francisco increased its tipped minimum wage to $12.25, before tips, and experienced positive
job growth in the leisure and hospitality industry the following year. Raising the minimum wage
increases consumer spending and boosts the economy. A study by Doug Hall and David Cooper
estimated that a $2.55 increase in the minimum wage would increase the earnings of low-wage
workers by $40 billion and result in a significant increase in GDP and employment. A raise in the
minimum wage predominantly benefits low-wage workers, precisely those most likely to put
additional income directly back into the economy, kick starting a virtuous cycle of greater
demand for goods and services, job growth, and increased productivity.

Schug (2016) stated that wages could be set by supply and demand. If employers see
difficulty holding onto their staff, then they should simply pay more or have greater benefits, he
added. The interaction between the employer and employee would set that market rate for
pay. “Why mess with a price that’s set by supply and demand?” Schug asked. Other professions
compensation based on their market rates, and the minimum-wage workforce only makes up
3.3 percent of all hourly paid workers, according to the Bureau of Labor Statistics. Too much
effort is spent on discussing the issue of minimum wage, which impacts only a small group of
workers, Schug said. Nevertheless, it looks as though the minimum wage will remain and
continue to rise over time in some capacity. That doesn’t mean there aren’t flaws with the
system. Not all who earn a minimum wage would benefit from increases in the same ways, so
Schug said economists prefer policies that are designed to help the people they’re intended to
benefit. 

Minimum wage will also stimulate consumer spending, help businesses' bottom lines,
and grow the economy. A modest increase would improve worker productivity, and reduce
employee turnover and absenteeism. It would also boost the overall economy by generating
increased consumer demand

Positive effects of minimum wage law to employment

Minimum wage increases most directly affect earnings and employment in the formal
sector. Higher minimum wages lead to higher wages for formal sector workers who keep their
jobs. Studies for developing countries suggest that the positive wage effect is strongest for
workers earning near the minimum wage. As a result, increases in the minimum wage tend to
compress the wage distribution (equalize wages) in the formal sector.

Monitoring the employment effects of minimum wages is essential. Employment effects

have long been at the centre of minimum wage research, with much debate over whether and
how minimum wages affect jobs, employee numbers and hours worked. As highlighted by
Belman and Wolfson, “support for the minimum wage is premised on its improving the lives of
those most vulnerable in the labour market. If a minimum wage leads to job loss for many of
those same people, serious questions arise with respect to its relative benefits and costs”.

Debates on employment effects are also frequently controversial, with different

economic theories leading to different predictions. According to one view, minimum wages
increase the cost of labour above the marginal productivity of low-paid workers and thus prices
them out of the market. Other theories consider that up to a certain level, the cost of minimum
wages can be absorbed through a combination of lower wage increases for more highly paid
workers, lower profit margins, higher productivity, and/or lower employee turnover. Keynesian
macroeconomics suggests that employment may increase if minimum wages lead to higher
domestic consumption and aggregate demand.

Neoclassical economic theory predicts that higher minimum wages will lead to lower
employment. This may happen for two reasons: firstly, because minimum wages may force
enterprises to raise the prices of their goods and services, and consumers or international
buyers who face higher prices may therefore cut back on their demand (the so-called “scale
effect”). Secondly, when low-wage workers become more “expensive” due to the minimum
wage, firmsmay decide to replace some of them with more machines and a few skilled workers
to operate these (the “substitution effect”). If these effects are large, aggregate employment
levels of low-wage workers may decline. There is also likely to be a “cross-industry” effect, as
employment is predicted to fall in labour-intensive industries, where the proportion of low-paid
workers is higher and where labour costs represent a high proportion of total production costs
for enterprises. In other industries, employment may remain unchanged or may even increase,
as consumers spend more of their money on goods and services where prices are less affected
by minimum wages.

Macro-economic theories highlight the fact that higher wages not only raise labour costs
for employers, but they also increase consumption demand among the low-paid workers and
their families. Assuming there are no large negative effects on external competitiveness (which
might be the case for very export-oriented economies) or investment, such positive
“consumption effects” can lead to increases in aggregate demand and employment. Macro-
economic perspectives show that even if some low-productivity firms reduce employment or go
out of business, this does not necessarily mean that aggregate employment will be reduced.
Employment may expand in other firms and higher wages may attract more people into the
labour market.

Although there are fewer studies in developing countries, similarly mixed findings
emerge.1314 A recent World Bank publication concluded that “although the range of estimates
from the literature varies considerably, the emerging trend in the literature is that the effects of
minimum wages on employment are usually small or insignificant (and in some cases
positive).”15 One review of studies in ten major economies (Brazil, Chile, China, Colombia,
India, Indonesia, Mexico, the Russian Federation, South Africa and Turkey), found small or no
impact on employment, except in circumstances where the minimum wage is set at very high
levels.16 A review of experiences in Latin America also concludes that employment effects of
minimum wage increases are varied and depend on the level.

Raising the minimum wage increases worker productivity. Studies by leading

economists, including Nobel laureate George Akerlof of Georgetown University, found that
employee morale and work ethic increase when employees believe they are paid a fair wage.
Economists have also linked higher wages to better physical and mental health and reduced
“decision fatigue,” leading to higher productivity.

Minimum wage law affects businesses

An increase in wages can lead to longer tenured employees, reduced turnover, and
significant productivity improvements. Establishing an exceptional team that is committed to
the goals and vision of a company is an important element for success. Perhaps for this reason,
a recent survey found that 47 % of business owners actually favored an increase in the federal
minimum wage.

With increased salaries, however, managers and owners should expect more effort and
dedication from their employees. Timekeeping software and better workforce management are
good strategies to increase worker output and keep your company focused on both short-term
and long-term business goals. Additionally, time and attendance systems or tracking
automation can help you validate that your employees are putting in the extra work needed to
make up for increased labor costs. While increases in minimum wage laws can certainly cause
economic stress to businesses, a more efficient workforce management might actually allow
companies to turn extra labor costs into increased productivity and efficiency leading to better,
long-term profit margins. McDonald’s raised its minimum wage to $10 in 2016, and offered
tuition help to employees. Workers who stay for a year can also earn up to five days of paid
vacation. Since this started, McDonald’s workers are more accurate at taking orders, they are
serving customers more quickly, and customers are happier with their service.

Business executives support a higher minimum wage. A survey conducted by Republican

pollster Frank Luntz that was leaked to the Washington Post in April found that 80 percent of
business executives supported increasing the minimum wage. • Small business owners support
a higher minimum wage. A national poll of small business owners conducted by the American
Sustainable Business Council found that 60 percent of small business owners support increasing
the federal minimum wage to $12 by 2020 and indexing it to inflation. Businesses are
voluntarily raising wages. Hundreds of businesses across the country have pledged to pay their
workers at least $12 an hour by 2020.

Naturally, business leaders hoping to keep their operating costs low are likely to oppose
a minimum wage increase, but Cooper (2015) said this is because they’re not looking at the
broader market picture. With fatter paychecks, workers have increased purchasing power, thus
benefiting businesses. And with a federal minimum wage increase, it impacts more than just a
single business; all other organizations with similar employee makeups will face similar changes
to their payrolls. “Good business leaders want their employees to have a decent life and want
their employees to make enough money to afford to live,” Cooper said. “They just don’t want to
be put at a competitive disadvantage.” If leaders think more holistically about how a rising
minimum wage would affect the labor market and the economy as a whole, they’re likely to be
more supportive of minimum wage increases.
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