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Minimum Wage Laws and Economic Wellbeing in the US

The minimum wage is an issue that is controversial in US politics due to its overall impact on the economy. Perspectives vary based on the benefits considered: either immediate gratification or long-term macroeconomic implications. I believe that a reasonable minimum wage should be established at a federal level in order to prevent abusive employment practices. However, laws that attempt to raise the base hourly wage at the state level usually have adverse economic consequences that impact workers far more than a potential minor increase in wages.

All salaries, including minimum wage, are established based on economic models within a competitive market. Each area and industry has a demand for and supply of labor that helps businesses and governments alike to establish wages. An artificially established minimum wage that is excessive will begin to destabilize this balance due to the changes that firms will have to implement. Any mandated wage increase requires businesses to compensate for their rising costs.

Some companies maintain low-skilled workers as a majority of their labor force. Increased salaries will result in significant expenses added to the balance sheet. In order to maintain growth, firms may choose to cut costs by streamlining the labor structure. That includes dismissing employees who do not have critical functions, limiting hours and benefits, and reducing any potential expansion. With respect to the labor demand-supply curve, there will eventually be an imbalance. There would be an excess supply of workers (due to layoffs and more people drawn to work by higher wages) and low demand (as firms would limit the hiring of low-skilled labor).

The effect of a minimum wage is also reflected in the income of workers. It is a paradoxical phenomenon since any increase in the minimum wage is meant to increase the financial well-being of low-skilled working-class employees. A commonly made argument is that at the current minimum wage, it is difficult to work full-time and pay rent or mortgage without financial strain. However, even in states with wages significantly higher than the federally mandated minimum, the same principle applies.

Housing is a separate issue, as its pricing is dependent on scarcity. Nevertheless, as minimum wage increases, businesses are forced to accommodate by raising prices for consumers. The effect applies across industries and supply chains. At the same time, it has been shown that the average monthly income trajectories begin to decline significantly.

Therefore, the minimum wage has a cumulative effect on a worker’s long-term well-being. Reduced employment rates and lost wages disproportionately target a specific social group of low-skilled workers (mostly youth). In combination with increased prices, it begins to have an adverse socio-economic effect, since the workers continue to experience troubles with bills and have little money left to spend on commercial needs (creating more financial difficulties for businesses). In addition, a decrease in employment results in lost opportunities to gain experience. It reduces long-term upward economic mobility and career progression for individuals in this wage band. Minimum wage laws prove to be an ineffective method of improving economic well-being, most often resulting in destabilizing consequences.