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The Problem of Minimum Wage

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In this essay, our group chooses The State of California as the sample state to analysis their labor market and other information. The State of California’s total labor force was about 19 million and the unemployment rate was 4.2 percent in May 2018, which slightly decreased from last year. The labor force participation rate of California was 62 percent in May 2018. In addition, start from Jan 1, 2018, if employers with less than 25 employees, the minimum wage is $10.50 per hour, and the minimum wage is $11 per hour when employers with 26 employees or more. Moreover, there were 17,089,500 jobs in total nonfarm industries and gained 5,500 jobs in May. There are relatively many companies and small businesses in California, which offer employees various job opportunities. The wide variety of careers and jobs including Education, Health, Manufacturing, Financial activities and Other services.

Let us now assume that California’s minimum wage has doubled. Since California is a state with a well-developed economy, no company can grasp the labor market on their own. So, they have to follow the market rule. The doubling of the minimum wage doubles the company’s cost of employment, which leads to an increase in the price of the goods. The increase in the price of goods will lead to an increase in people’s living costs and thus affect people’s budget control. However, the doubled minimum wage will also increase the income of low-income people accordingly.

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It seems that raising the minimum wage does not have any impact on life. But the reality is not a perfect model. The changes above will not all happen at the same time, so the results look different from what we predicted. First, since the minimum wage is a government policy, it will effective immediately. This means that the company will soon raise wages for employees. But the company must ensure that the cost of the goods does not exceed the price, so it seems that California companies have two choices, either to increase the price of the goods or to reduce the cost of employment through layoffs. Note that people now have not yet enjoyed the benefits of a minimum wage increase, and the increase in the price of goods will prevent them from continuing to live as usual. This effect will greater impact on low-income people, who are the people we want to help by raising the minimum wage.

There are some advantages and disadvantages of doubling the minimum wage for sure. After doubling the minimum wage, the wage rate changes from $11 per hour to $22 per hour. At first, it definitely helps to reduce poverty because the low-income workers could earn more money. Also, when people have higher income, they tend to spend more on goods and more money and time on leisure (assume leisure is a normal good) and when people spend more, that helps economic growth. However, the minimum wage cannot keep raising when the costs of living going up. Therefore, double the minimum wage will make people who have low income make more money at first and then hurt them at the end.

In addition, double the minimum wage would increase the unemployment rate because businesses need pay workers more and need fire some workers to reduce the costs. That would make more workers lost their job even though they want to keep working. Also, if the minimum wage increases, the profits of businesses will decrease. For adjusting that, business could either fire workers (we mentioned above) or increasing the price which would cause the inflation. Therefore, double the minimum wage is inefficient and unfair. It only benefits for the low-income workers for a short time. After a while, everything hurts: poor people become poorer, businesses earn fewer profits, inflation and the unemployment rate increase.

Overall, our group believes that the minimum wage is worthwhile to alleviate low wage and income inequality. For policymaker, the minimum wage increases the productivity of workers thus increase the whole economic outputs as workers can raise their spending. The positive effect of the policy also including more jobs are created in the labor market, the poverty is reduced, and government welfare spending is decreased. However, this policy would lead to a counter production in some circumstances. Because double the minimum wage will increase labor costs for businesses, and if the minimum wage higher than the average level, it will force many small businesses to cut down on employees and their hours to compensate for their losses. Moreover, double the minimum wage will lead companies to hire fewer low-skilled employees and more high-skilled employees. Because workers with low skill levels do not justify higher wages from the employer’s perspective.

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