Today

As the debate for raising the minimum wage goes on today it is once again small businesses that are shouting that they will be put out of business. Though as you can see for the past 70+ years this has always been a concern. Our small businesses are still here however and we find that businesses will adapt to changes in wages.

In Neumark’s journal he explains how this can happen in two ways, the substitution effect and the scale effect. The “substitution effect” occurs as employers substitute away from now-more-expensive low-wage labor toward higher-wage labor or other inputs.  The scale effect then occurs because this substitution away from low-skilled labor and toward other inputs raises costs of production and hence prices, reducing demand for the product and there-for the overall scale of operation of the employer.  These models only occur when businesses are minimizing costs to begin with. If a company can offset the cost of raising wages by changing to cheaper materials or operating most efficiently then cost of wages will not affect them. But if a company has been running at their more efficient levels and there operating costs are as low as they can go then businesses will need to raise costs to cover expenses. Raising costs may then lead to a lowering of demand for a product and in return create the loss of jobs when the company no long needs to make as much of a product. But, not all companies will face this. The demand curve, how much an economy is willing the purchase a product at a given rate, may be highly inelastic. Meaning that price on certain products may not change how much is still demanded of them. Jobs will be safe and companies will not suffer. Others offer to refute this claim, saying that increased spending power of low-wage workers will create jobs to support added demand. Businesses also have another choice instead of lying off or raising prices, they could just accept a lower profit margin.

In a case study in 1994, by David Card and Alan Krueger, it was concluded that the raise in minimum wage “did not lower employment… of the fast-food industry”. In another study of the San Francisco airport employees in 2004, found that “increasing wages did not lower employment, and instead reduced employee turnover”. Dozens of similar studies, looking at a variety of locations and industries, have been published since then, and the results have run the same.

How should we correct these wage problems. Some believe that we should go back to being a free market and let the economy decide the wage rate. The video at the top of this page is a propaganda piece from the FEE, Foundation for Economic Education. They make this sound like a great idea. So why has the government not withdrawn minimum wage standards and gone to this. Should they?

Looking back on history we were a free market economy before the 1930’2. This is what caused child labor and people working many hours and still not being able to meet basic needs. Women were paid much less then men, though this still goes on it is getting better, and there people had to work over 40 hours with out getting overtime pay just to try to keep out with their living necessities.

When society was given the role of setting wages it failed. Government intervention was needed we need to keep that in mind. What has and has not worked in the past needs to be considered now. We are a democratic nation and this issue is not for me to decided but to further educate everyone and give them a better insight on how they feel this issue needs to be fixed.