Inefficiency of the Minimum Wage

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For instance, the minimum wage in New Jersey has been $7.25 since January 1, 2012. Because of inflation, which is the rate by which the prices of goods and services increases, the minimum wage is now seen as less effective by today’s workforce to keep up with the growing cost of living. An increase in inflation decreases the value of a dollar. This has caused individuals to protest that $7.25 an hour is not enough for a minimum wage worker to sustain him or herself. So on November 5, 2013, New Jersey voters approved an amendment that would increase the minimum wage to $8.25 in January of 2014 with annual increases based on cost of living increases. However, an increase in the minimum wage would force business to raise prices, decrease worker hours, and/or cut workers because businesses are not willing to pay the extra amount, as evidenced by the supply curve. According to The National Federation of Independent Business, the minimum wage increase in New Jersey is projected to increase unemployment over the next 10 years — a loss of 13,700 jobs if there is not much inflation, 22,700 if inflation averages 2% and 31,800 if it averages 4% (7). Also, The Employment Policies Institute said the increase would lead to a loss of 4,700 existing jobs, particularly for low-skill and young workers (7). According to Bureau of Labor Statistics data, of the 1.78 million workers in New Jersey who are paid by the hour, about 49,000 (about 3%) are paid the minimum wage, another 54,000 are paid less than the minimum wage (7). However, we need to understand that the change in minimum wage has a greater impact that goes beyond the 6 percent or so workers that get the paid minimum wage or below it. We need to keep into account that raising the wage of those workers to $8.25 would also mean that those that had a salary between $7.25 and $8.25 or had similar salaries would also seek to have a raise. This creates a chain reaction that forces business to give a wage increase to more than just the individuals that earn the minimum wage. This is detrimental to labor market because workers would be paid more than they actually deserve to earn which could create inefficacy in the labor market. The increase in minimum wage would increase the average total cost of business production, and if the average total cost would then exceed the marginal revenue of businesses and force businesses to cut back on production.

Currently, there are 141,000 workers in New Jersey making between $7.25 and $8.25, and 54,000 workers making below the minimum wage (7). If the minimum wage increased, businesses would have a movement along the demand curve which would result in a lower quantity of hours demanded. 195,000 workers making below the future minimum wage of $8.25 would be cut from the workforce because of the increasing costs of those employees. Additionally, new people will try to supply more labor because of the minimum wage increase, but businesses will not demand them. Those that are lucky enough to keep their jobs will enjoy higher wages and an increased standard of living. However, according to a study by David Neumark, Mark Schweitzer, and William Wascher, the minimum wage simply redistributes money among low income families- some families will escape poverty through higher wages, but others will enter it through lost jobs (8). Thousands of people who make less than $8.25 will lose their jobs. Additionally, a higher minimum wage will cause an even bigger barrier to employment to workers who never had a job before, making it harder for them to gain the skills needed to succeed in the workplace, but people with jobs will also learn fewer skills thanks to minimum wage increases. According to a study by David Neumark and William Wascher, young people received 1.5-1.8 percent less on the job training with a 10% increase in minimum wage (8). Therefore, raising the minimum wage will not only cause fewer jobs for people, but also decrease the value of youth in the eyes of employers. The minimum wage has increased the average total cost of businesses and has stopped businesses, especially small businesses, from hiring unskilled teenagers and young adults to gain working experience (5). This has led to an increase in teenage unemployment and also an increase in the number of unskilled workers in the labor market. Accordingly, states with minimum wages above the federal mandated minimum wage have higher rates of teen (16-19) unemployment than those that have the federal minimum wage. In 2010, 63% of states that had high minimum wage laws suffered unemployment rates that were much higher than the national average of 9.1% (i.e. Nevada-unemployment: 13.4% minimum wage: $8.25, California-unemployment 12.1% minimum wage $8.00) (9). Most states that had higher state mandated minimum wages had higher levels of teen unemployment. These numbers have definitely risen since and ultimately show the true impact of the minimum wage on unemployment. They also show how the effects of increasing the minimum wage would increase the average total cost of business production, and force businesses to cut employees, hire few workers, and cut employee hours to keep up with marginal revenue of businesses.[pic 9][pic 10]

In conclusion, raising the minimum wage ultimately creates inefficiency within today’s labor market. New Jersey’s call to increase the minimum wage by over 13% will make it harder for businesses to hire workers because the workers would be too costly in labor markets that have a low equilibrium wage rate. Raising the minimum wage would pay workers a larger sum of money than what the labor required actually warrants. An individual flipping burgers would make the same amount as an individual that could just be sitting at a desk watching the clock tick as money falls into his or her pockets even though flipping burgers may require more work and effort. The minimum wage is meant to help the poor gain a better living salary, but we must acknowledge that there is no guarantee that even the equilibrium wage in the market is a living wage. Although the minimum wage is meant to lower the poverty rate and help individuals gain a living wage, it mainly helps out white individuals (78%) that live in households that are already far above the poverty line; around two-thirds of individuals that make minimum wage are workers that live in households with incomes that are more than twice the poverty line. Minimum wage laws can set wages, but they cannot guarantee workers jobs. Raising the minimum wage will not create more jobs and employment for workers; it would ultimately lead to increased unemployment. Raising the minimum wage would also ultimately force an increase in the wages of other working individuals that make between $7.25 and $8.25 or around it to keep up with the increase in the minimum wage. This increase in salary earnings of workers would force businesses