Minimum Wage and Poverty

By Asad Sajjad

Minimum wage is the lowest hourly, daily or monthly compensation a worker can receive from employers in exchange for labor and service. Much of the world has no minimum wage set for workers. This means that the marketplace is left to decide how much a worker should be paid for their work. While most will agree that a minimum wage should be set by the government, the amount and how often it should be raised is something that is constantly debated. As the cost of living has gone up all around the US, the issue of minimum wage has become a very hot topic. I will be talking about the history of minimum wage, why it’s necessary and I will present the effects of minimum wage in regards to poverty.

In the United States minimum wage is set by the federal and state governments. In June of 1938, President Franklin D. Roosevelt signed the landmark Fair Labor Standards Act (FLSA). The FLSA set federal minimum wage at twenty-five cents per hour (about four dollars and seven cents 2012 dollars).sdasdsaasdas

This act was heavily debated and capitalist argued that wages payable should be left to the free market. The US congress argued for this legislation under its constitutional grant of authority to regulate interstate commerce.  While this act only applied to industries that made up about one fifth of the workforce, this was an iconic piece of legislation as at the time federally mandated minimum wage was unheard of. A few states had made non-compulsory minimum wage but did nothing to enforce it. This act also set standards for minimum work age, maximum work hours allowed per week, and gave some bargaining rights to the workers. While this act was a great start to establishing minimum wages, it didn’t nearly cover the entirety of the American labor force in terms of establishing minimum wage, and workers standards. It was also noted that this act generally only applied to industries that were composed of mainly male workers.

A common misconception about minimum wage is that “most workers earning the minimum wage are young workers, part-time workers, or workers from non-poor families”. This argument is flawed and invalid especially in recent times as the global economy is still recovering from recession. Jobs that were previously done by “younger workers from non-poor families” are now being done by older adults who may have lost their career related jobs due to the global economic recession.

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Developing a minimum wage is great for a variety of reasons. The most common argument for government regulated and controlled minimum wage is economic benefit. Basic macro-economic principals state that RGDP is driven by variables like consumer spending and consumer spending is based on people’s real income.  The only way for the government to increase people’s income is to increase people’s real wages and essentially let the business cycle flow. Economists have proven that countries with set minimum wages generally do much better financially than those who don’t regulate minimum wage.

In most cases minimum wage helps to fight poverty. According to economist James Galbraith, “raising the minimum wage would raise the incomes of over 28 million Americans”). He based this theory on the idea that once minimum wage is raised, employers who pay slightly above minimum wage now have to increase their wages to meet and maintain competitiveness in the market. For example, a company paying its employees nine dollars an hour would have to increase their wages if the government decided to set minimum wage at nine dollars per hour. If this company were to keep their current wage, workers would start looking for new higher-pay jobs that pay a wage “adjusted” for minimum wage. Overall, an increase in the minimum wage would be beneficial for not just those who actually work for minimum wage. An increase in minimum wage would increase the income of millions thus stimulating the economy while increasing people’s quality of life.

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            Minimum wage doesn’t always pan out in every economic situation. I will briefly present a few cases in which minimum wage has done little to nothing to help the poor. In Mexico, “workers in the poorest households had the largest wage gains following an increase in the minimum wage but the wage gains were not large enough to push most of these households above the poverty line” (IZA World of Labor). In Brazil, “higher minimum wages did not raise the incomes of households in the bottom decile of the household income distribution” (IZA World of Labor). In both cases the wage inequality was so big that raising the minimum wage had very little difference on controlling poverty.

The idea of establishing a minimum wage has been spreading all around the world. Most developed economies have established minimum wages for their workers and have developed basic labor standards that employers much follow. These so-called government “regulations” benefits workers in many ways as the workers get to earn wages that are much higher and lead to a better quality of life. The workers also benefit from the enforced labor standards such as minimum work age, and maximum hours per week. Creating a minimum wage and adjusting it regularly to match cost of living is a great way for any country to reduce its poverty level. As this issue continues to develop, Unlike Mexico and Brazil, poverty levels and wage inequality aren’t nearly as large so even the slightest increase would push low wage workers out of poverty.  I hope that those who argue against minimum wage and believe the various misconceptions try to understand the benefits of minimum wage.

Works Cited

Does Increasing the Minimum Wage Reduce Poverty in Developing Countries? IZA World of Labor, 1 May 2014. Web. 3 Apr. 2015.

Kurtz, Annalyn L. “Minimum Wage since 1938.” CNNMoney. Cable News Network, 5 July 2013. Web. 6 Apr. 2015.

“Minimum Wage Mythbusters.” – U.S. Department of Labor. DOL, 2 July 2014. Web. 5 Apr. 2015.

Galbraith, James. ” Raise Minimum Wage in the US.” Arizona Central. Gannett Companies, 13 Apr. 2015. Web. 13 Apr. 2015.

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7 responses to “Minimum Wage and Poverty

  1. Great post! It was very informative.

    Liked by 2 people

  2. I agree with you on minimum wage being one of the best policy to reduce the poverty. Some might suggest Earned Income Tax Credit as an alternative, but the high-administration cost and the incentive to increase the spending lowers the credibility of it.

    Liked by 1 person

  3. The article is very informative as it reviews minimum wage in great depth.

    One issue to consider is that labor economic theory tells us that raising a minimum wage would lead to higher unemployment. Whilst, the article has provided empirical evidence to suggest that minimum wage would lead to a higher median income, there is still the tradeoff of employment. It is a complex issue and an important factor to consider would be the purchasing power.

    Liked by 1 person

  4. chendaniil

    I really enjoyed reading your post! Didn’t know much about the minimum wage history. Also, I was in that “what people think” category. Honestly, I couldn’t expect that even slight change in minimum wage can get so many people out of poverty.
    What do you think can be done in order to improve the situation in Brazil and Mexico?

    Liked by 1 person

    • asadsajjad17

      I think Brazil and Mexico are in different positions right now. From what I know, Brazil has generally done better than Mexico GDP wise. But right now the Mexican economy has a higher growth rate. While this is obviously great, I think this may be due to the fact that Mexico is just south of the US Border. Mexico is one of America’s greatest trade partners so when the US government launches economic growth programs (like the American Recovery Act under President Obama), Mexico will certainly see a nice “free” boost. Brazil on the other hand doesn’t necessarily experience such “free” boosts and is kinda of on its own in terms of building economy. The Brazilian economy has been regarded as one of the best to invest in as there’s a booming middle class, and there’s been substantial growth. In recent times when we hear “top developing economies” its usually China, India, and Brazil so that’s definitely a plus. I’m not really sure how this really affects minimum wage. But from what I can tell I think Brazil has better chances of raising minimum wage as the cost of living rises.

      Like

  5. alisonborman

    I really enjoyed reading this article, particularly your responses to criticisms of raising the minimum wage. I also found it really interesting that in instances where raising the minimum wage was ineffective, like in Mexico, it was because the income inequality was still so severe.

    Liked by 1 person

  6. Dear Asad,

    What a thorough study on minimum wage. Thank you for providing readers with such a detailed overview of the subject. With so many economic issues, there are always tradeoffs, costs and benefits. There are also so many different factors involved in this. The idea is how to expand upon the benefits so that it reaches a larger scope of people. When wages adjust with the cost of living, it can make it more feasible for more people to meet their needs and living standards.

    ~Professor Myra Chaudhary

    Liked by 1 person

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