In the face of economic crisis - is the minimum wage increase justified?

Updated: Jul 3, 2020

With the slow conclusion of the Covid-19 pandemic, the economic problems triggered by the lock down are continuing to be felt by society. Unemployment is one of the major consequences of the stalling economy and has become a forefront of financial concern- the record numbers hit in the first three months of the pandemic has forced many into financially treacherous waters. A problem which only feeds the economic theory that it is the minimum wage which damages employment, and asks the question whether during this current climate the 2019 proposed minimum wage increases in the U.K and the U.S are still justifiable. Too fully attempt to answer this debate it is necessary to not only judge the impact on the worker, but also the repercussions upon business and the wider economy.

The main benefactors of the minimum wage are the low-wage workers in the economy, the additional funds allow individuals to move away from a pay-check to pay-check lifestyle and support low-income families. The moral argument here forwards the idea of supporting those who struggle to sustain themselves on a minimum wage job, and to provide greater financial freedom to those in need, although the benefits of raising wages are not just ethical. This rhetoric also has several benefits to the wider economy itself. The increased wages enhance net spending, the excess cash in the pay checks of the workers is put back into the economy through retail and pleasure spending, money which previously only went to necessities. Moreover, it has been proven that higher wages incentivises greater productivity in the workplace, from either greater company demand of employees or motivation from monetary influence, acting as an additional bonus to businesses. Furthermore, in a CBO report published in 2019, the increased minimum wage proposals in the U.S would allow 1-1.5 million to climb out of the poverty line, advancing the idea that the increased wages are returned as capital into the economy. The argument for higher minimum wages is almost universally supported by the public and the workforce as it offers households the chance to live with reduced financial stress as well placing further cash in economic circulation. 

However it is important to also examine those who are failed by the minimum wage as well as considering the dangers of its proposed increase. The CBO report from 2019 also predicted that the proposed changes in the U.S could cause up to 4 million to be rendered unemployed, moreover as argued by the businessman and economist Peter Schiff this can act as a double negative to those effected. Greater pay-roll tends to lead companies into looking to increase revenue, which can take the form of an increase in produce pricing, staff lay-offs or reducing operating costs, which can often augment the cost of living. This presents the fact that those rendered unemployed will not only be without income but their cost to sustain themselves may also increase. The dispute against the minimum wage is that it prices many people out of work, the removal of the bottom rungs of the job ladder creates an impossibility for many to climb on. An individual who can only offer a service of £6 an hour of productivity is not going to be hired for £8.25 an hour, as it fails basic business common sense. Thus supporting the adage that an employed man working for £7 an hour is far happier than an unemployed man in a society with a £10 minimum wage. Allowing low skilled workers onto the job ladder through low minimum wage jobs, offers an opportunity to gain skills and experience which can open doors to higher wage jobs in the future. One of the major problems in the U.K which has been ineffectively tackled in recent years has been homelessness, a predicament which could in some aspects be aided by these low wage jobs being opened up. It is of course apparent that homeless people may be suffering from factors far more severe than unemployment, however giving them this income and work experience may allow them to afford necessities such as food and occasional shelter. The overall point in the anti-minimum wage argument, is the need to protect low skill workers in the competitive job market and to provide all people an access point into employment. Returning effective buying power to the public is of importance, whereas it shouldn’t neglect and leave behind those at the foot of the ladder. 

Within public opinion it is stereotyped that it is big corporations who stand to benefit from a low to no minimum wage, however in the current economic climate this idea does not seem to be supported. Global businesses such as Amazon and McDonald’s have recently began heavily promoting the higher minimum wage laws in the U.S, a vast U-turn in policy but not one motivated for the betterment of their staff. In a study conducted by Harvard economists they calculated that mid-sized restaurants are 14% more likely to fail with each $1 the minimum wage increases, and with the U.S promising a $15 base wage by 2026 this certainly spells fear for small restaurant owners. This is why McDonald’s move to automation in the recent years has put them in a prime position to benefit from the potential failing competitors, in theory the increase in wages would favour the fast food chains who are able to facilitate the replacement of jobs through automation. Moreover this offers an opportunity for big chains to purchase their mid-tier competition who have suffered at the hands of the rising payroll. Wage increases will be easily absorbed by large corporations, who traditionally use higher salaries to incentivise work, whilst leaving smaller businesses too struggle. Furthermore high minimum wages may force many businesses to move their labour and workforce abroad. Many blue chip companies such as Microsoft, American Express and Ford have already moved large parts of their business to places such as India where the minimum wage is far lower varying from $2.40-$6.35 a day. This ultimately asks the question that with an increased minimum wage. will big corporations transfer even greater numbers of their business abroad, as it becomes more cost effective, or could it move in another direction and favour a greater move towards automation. The necessary funding to transition to these systems is readily available to such companies, whilst it is the small businesses who credit their survival purely to their employees. Overall whichever way you look at it, large corporations will be mostly unaffected by the minimum wage proposals, with the small businesses being inevitably hurt. 

During the current pandemic small businesses have been one of the worst hit in the stalled economy, the proposed minimum wage hike may only put pressure onto already struggling businesses. However it asks the question whether small businesses and workers could have benefitted from a lower minimum wage during the pandemic. This policy change could have facilitated small restaurants and other small businesses to continue running delivery, or a Covid-19 safe service at reduced operating costs. Furthermore, this may have also benefited workers who had been forced into unemployment due to the pandemic, supplying an important income to those who needed it during a period of very low career availability. However, this theory relies heavily on government policies actually allowing employment, especially in sectors which could have increased the infection rate. The question now is, in our recovering economy, whether small businesses have the capacity to pay an increased minimum wage. Prior to the lockdown a survey in the U.S concluded that 57% of business owners believed they would be unaffected by the wage increases, a seemingly positive green light on the policy. However recently companies have been seen to request a delay on the proposed increase in both the U.S and the U.K, unequivocally due to the impact of the pandemic on business operating costs. During this current predicament it would seem irrational to place further strain upon businesses, some who are still yet to re-open, by imposing increased cost, although if businesses still stand to be largely unaffected it seems a complete no-brainer due to its positive. Certainly though with the impending technical recession enveloping the nation this is an important discussion to be had. 

To conclude, there is no doubt that many benefit from the minimum wage, and accounting for inflation the buying power of the minimum wage is much weaker than it was 50 years ago, something which certainly needs to be addressed. However, during this current environment the question is raised as to whether raising wages would be counter-productive to the workforce and the greater economy. It is only a small minority of big businesses such as Amazon and Netflix who have benefitted from the virus, leaving small businesses to struggle. Furthermore with the potential of the minimum wage cutting the jobs of those employed even further could we be left with unemployment numbers returning to those of 15 years ago, rather than the downward trend of recent years. This debate in public perception is often boiled down to one of a moral and an economic argument, however in this scenario the lines seem to be blurred, and both sides feed into both moral and economic motivations for different groups within society. During this financially delicate time it is important to protect those of the working class who have been one of the most ravaged by virus, and with the political back lash of potentially precipitating further unemployment it seems likely that these minimum wage proposals will be pushed aside for the near future.

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