Are Higher Minimum Wages the Solution to Poverty?
Can real positive impact be made on an economy that demands a higher minimum wage? The debate has been ongoing and increasing, so where do the results stand right now?
Beyond the immediate and obvious benefits that come from earning more money – namely, living above the poverty line to live a financially secure life – businesses benefit through a noticeable decrease in staff turnover. Employees are more able to participate in the economy, helping to strengthen it overall, and an increase of repayment of debts, all of which help in lessening the negative impact of economic shocks or turmoil.
It is important to look beyond the immediate benefits to those earning the wage, too. The government is less saddled with the paperwork and convoluted processes that come with the need to provide social assistance programs to those living below poverty lines. The percentage of the salary taken out toward the employees’ pension funds help the government in the long-run as well, ensuring citizens will have more funds of their own to rely on in their post-employment years.
The most obvious is a reduction in the number of jobs available, as businesses offset the increased cost of employing fewer people. Those that are employed may find there are fewer hours available for them to work. An increased minimum wage also does not benefit middle-income earners, who are also saddled by debt from expenditures like education and mortgages (they could be helped by a reduction in taxes and/or tax reform, improvement to availability and cost of transit, decrease in education costs, and mortgage reforms).
Small businesses feel the increase the most, with particularly loud voices coming from within the restaurant industry, who are only able to offset the cost of their own employment requirements and increased costs from suppliers by so much on their menus.
Another argument is that youth should not be earning a wage that is beyond their minimal experience and a lower skill set, and forcing higher wages for them means fewer job opportunities for this segment of the population.
Furthermore, increasing the minimum wage leaves a larger pool of unskilled workers, and, as employment increases in skills, may even cause an increase in inequality in terms of skills and pay scale.
Let’s Take a Look at a Few of the World’s Top Earners for Minimum Wage.
You may have assumed the highest minimum wage in the world would be in northern Europe, but you’d be wrong. As of July 2018, Australia’s sits at $18.93 per hour, and so far, their economy has been fairing quite well. They have a low unemployment rate, have avoided a recession for decades, and consumers have not had to bear the brunt of the expenditure through a significant increase in the cost of living.
As with anything, the benefits are not without problems, however. One of the most notable being underemployment (which refers to the number of employees who would like to work more hours, but are prevented from doing so due, in this case, to the employment cost).
At 14.36 Euros per hour, Luxembourg comes in second in the world for the highest minimum wage, and clocks in as the highest in the European Union. To offset concerns by businesses who fear they will take on the financial burden, the government provides tax relief to offset the increased cost.
The country has had a marked increase in population growth and managed to consistently have an increase in employment, along with a marked decrease in unemployment over the last 17 years. It is important to take into consideration it’s geographical location – offering a popular spot for those who commute in the neighboring countries of France, Germany, and Belgium. The government has been utilizing the marked population increase, aiming at becoming more than just the center for commuting and international finance and working at diversifying their economic base, doing so successfully while maintaining their high minimum wage standard.
A research paper written after a recent announcement regarding a new minimum wage increase in New Zealand examined the efficacy this method has on reducing poverty. It shows that a large proportion of those who receive these higher wages are members of households where earners are higher-income earners and conclude that therefore increasing wages are in reality not as effective in reducing poverty as presumed.
New Zealand was actually the first country in the world to create laws regarding minimum wage – and it was introduced to prevent exploitation of children and free labor through apprenticeship. Taking its origin into consideration, then, is it really the most optimal or appropriate solution to fight an entirely different issue: the issue of poverty? What other options are there?
Higher Minimum Wage vs. Universal Basic Income
The literature and outcomes of a higher minimum wage are very divisive in conclusion, and while it comes with benefits, it appears to miss the mark in reducing poverty. The reasons for this are multiple, but one very poignant one being that when a person’s income is increased by a minimum threshold, it results in losing out on a substantive sum of financial assistance from the government in the form of things like welfare, child assistance, and food benefits.
In other words, the way the system is created now actually discourages many who would like to work, from being able to do so, because the loss of assistance ends up being greater than the income an individual would receive. So, giving an increase in salary then is, on its own, arguably useless, unless it is combined with other measures. One of the solutions to this problem comes in the form of Universal Basic Income.
By providing everyone with a basic income with which to cover housing and food, people are able to not just work without penalty, can help alleviate the stigma of income disparity and class distinctions. The playing field of higher-income earners is evened by, you guessed it, higher taxes – but not by simply taxing the rich. There are in fact multiple methods through which these taxes can be levied that go beyond taking more income away; a most notable example being by changing to taxing of the income that is consumed through a Value Added Tax (VAT). Not that a consumption tax like this harder to get around than income tax, it is a fairer way of taxing people from disparaging income groups (someone earning $40,000 is not going to be spending money on luxury products like those in high-income brackets), while also alleviating concerns that middle-income earners, especially those who straddle two very different tax brackets, will pay for the brunt of the cost.
In the end….
Ultimately everyone can conclude what they want from the arguments, opinions, and research on what is the most effective way of handling issues of income disparity. But what appears certain is that, while higher minimum wage can be beneficial, on its own it ends up falling short of its goal of eradicating poverty. In the end, the approach should be holistic, and, in an ideal world, made by those who have a genuine interest in solving the problem rather than benefiting from it.