Policy Analysis Paper: Minimum Wage (Research Paper Sample)

SHORTCOMINGS OF THE MINIMUM WAGE POLICY
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Introduction
In light of the social contract theory, it is the responsibility of the state to secure the welfare of citizens in return for the citizens’ obedience to state authority. The minimum wage policy and welfare programs are some of the ways through which the state promotes the wellbeing of citizens. In the US, the minimum wage policy was implemented to protect disadvantaged citizens by establishing a mechanism for fair compensation in the labor market. Since its implementation in 1938, however, the policy has not fully achieved its goal of uplifting low-income families from poverty. This is because the implementation strategy exposes workers to additional taxes while denying them access to vital federal welfare benefits. This analysis paper argues that for the minimum wage policy to achieve its goal, it should protect low-income workers from paying more taxes on additional income as well as allow them to retain their welfare even after earning a salary increase.
Problem Definition and Framework
The minimum wage was introduced to help low-income working class families make ends meet. It was expected that by increasing the least amount that workers at the lowest level earned, the government will lift many families from poverty without incurring federal budget expenditure. The argument in favor of a higher minimum wage is centered on the need to enable more people earn more income and move above the poverty line. It was also thought that increasing the minimum wage will improve productivity since well-paid workers can sustain themselves better.
Despite these noble intentions on the part of the government, however, the minimum wage has not been very effective in helping the people it was intended to. In contrast, it ended up holding back the very people it was intended to help by squeezing them out of work, disqualifying them from federal benefits, and increasing their tax burden. Increasing the minimum wage pushed unskilled workers out of the job market because on the one hand employers sought to recruit more productive workers, and on the other hand, it encouraged skilled and affluent workers to apply for jobs that were previously filled by unskilled labor. Tax increments results from the government’s taxation system that requires workers to pay more tax for every additional dollar earned. At the same time, increasing the minimum wage pushed some workers above the earning threshold that qualifies for federal welfare programs. The upside of the situation is that the loss of welfare programs far outweighs the benefits of higher minimum wages because any income increase corresponds with increasing loss of federal assistance and tax credits. Thus, the wage increase is offset by the loss of government benefits, increased tax, and to some, loss of employment to skilled labor.
The development of this situation is as a result of government and market. It is a government failure because the federal tax and welfare systems compel workers to pay more tax and give up multiple welfare benefits as their wages increase. For instance, workers’ pay 15 percent payroll tax for every extra dollar earned, in addition to giving up 30 percent of housing vouchers, 21 percent of Earned Income Tax Credit (EITC) and 24 percent of Supplemental Nutrition Assistance Program (SNAP) benefits. The end result is that workers do not make any meaningful gain from an increase to their minimum wages. It is also a market failure because of the competitive nature of the capitalist mode of production dominant in democratic societies like the US. Market competition necessitates the efficient use of resources. Accordingly, employers seek to use human resources efficiently by recruiting productive workers. When the government raises the minimum wages, employers will be forced to replace unskilled workers with skilled to improve productivity and compensate for the additional cost of paying higher wages.
This issue is important to consider as an economic problem because it affects society’s most economically marginalized group, and reflects the failure of government policies to improve citizens’ economic and social welfare. Thus, the minimum wage is “not just a matter of increasing the purchasing power of those at the bottom; it is also about what constitutes a fair and just society.”
History of the Minimum Wage Policy
The minimum wage policy was instituted by Congress in 1938 under the Fair Labor Standards Act (FLSA). FLSA established the national minimum wage that acted as a “floor below wages” with the aim of reducing poverty and ensuring that economic prosperity was shared equitably across the entire labor force. The original minimum wage was pegged at 25 cents per hour. When the last increase of the federal minimum wage was enforced in 2007, it gradually raised the hourly compensation of the lowest paid worker from 5.15 dollars to 7.25 dollars in 2009. Nineteen states and the District of Columbia, however have a minimum wage that is higher than the federal rates. Washington State enjoys the highest minimum hourly wage at 9.19 dollars. Currently, the national average minimum rate in the U.S. is 7.57 dollars hourly.
In the last six and half decades since the minimum wage policy was established in 1938, minimum wage rates have varied considerably in relation to inflation adjustments aimed at maintaining workers’ purchasing power. From a lowly 3.09 dollars in 1948 to an all time high of 8.67 dollars in 1968, it slumped to an average of 6.60 dollars in 2013. However, while the current minimum wage is over a dollar an hour less than its historical highest rate, it affords low-income workers more purchasing power than at any time historically. Usually, Congress increases the minimum wage only during periods of low unemployment and flourishing economic growth rates. Thus, when the unemployment rate was at 5.4 percent in 1990, Congress raised the minimum wage, and did so in 1996 when the unemployment rate was 5.1 percent. Congress took a similar measure again in May 2007, when the national unemployment rate was 4.4 percent. Considering that an increase in minimum wage is a cost of production incurred by employers rather than a federal expense, it appears that the government takes advantage of increasing labour demand to compel employers offer better compensation terms to low-earning workers. This approach is in tandem with the goal of the minimum wage policy to reduce economic inequalities by passing the benefits of economic growth to disadvantaged workers.
Problem with Current Implementation of the Minimum Wage Policy
As currently implemented, however, the policy is effective for improving the financial prospects of low-income worker, whom it was intended to boost. It is the central premise of economics that the demand curve slopes downwards, that is to say, people buy less as the cost of goods and services go up. This is because high prices reduce people’s purchasing power, thereby limiting consumer spending. For instance, people would drive less if the price of petrol went up, and consume less burgers if animal products became expensive. The same principles and economic calculations apply to employers in the labor market. Labor is a service they pay for. Increasing the minimum wage makes this service expensive, which translates to increased cost of production. To cut costs and maintain their profit margins, employers would want to hire the minimum number of workers possible to run their businesses when the minimum wages go up. Alternatively, they will be unwilling to pay more wages to unskilled and therefore, unproductive labor if they can get skilled and more productive labor at the same cost. Consequently, employers would go for skilled and experienced workers and pay them the new higher minimum wages rather than stick with unskilled workers. This reaction to higher minimum wages is informed by the fact that businessmen cannot willingly incur increased employee compensation costs without corresponding improvements in productivity. Hence, they choose to hire few workers, lay workers off, or replace unskilled employees with skilled workers. This situation leads to loss of employment to the unskilled workers, the very working class that the minimum wage policy is designed to help get out of poverty. Coupled with loss of welfare program benefits and increased tax burdens, the end result of higher minimum wages is that it fails to achieve its goal of lifting unskilled and low-income workers from poverty. This issue needs to be re-examined and addressed if the minimum wage policy is to be of any meaningful benefit to low-income workers.
The minimum wage directly affects a relatively small number of American workers. In 2011, 3.7 million workers, just 2.9 percent of the entire US workforce, were earning 7.25 dollars an hour. At the same time, there are two distinct groups of low-income workers within the minimum wage bracket: school-going young workers, often pulling part-time jobs, and older workers. The majority of these workers, over half, are below 24 years old. The implication of this situation is that any raise of minimum wages does not benefit the real target, workers supporting families, but youngsters who are themselves dependants. It was never the goal of the minimum wage policy to help young workers earn more pocket money, but to help low-income workers to make ends meet. It is here that the minimum wage policy’s implementation strategy fails to achieve its goal by largely benefiting workers who have no family responsibilities. The blanket approach of applying the minimum wage to any worker earning below a certain mark ignore the fact that majority of the beneficiaries are dependants, such as ...