Minimum Wage Series: Part 3
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Minimum wage and economic development
A very tight minimum wage makes the disposable income of employees constrained but if it is raised it increases raise the earnings and contribute to higher marginal propensity to consume an additional dollar of income than firm owners or low-skilled workers who lose their jobs. Thus, minimum wage increases will result in higher economic growth. Simple correlational evidence on the relationship between minimum wage increases and GDP is not dispositive. An increase of minimum wage led to economic growth in boom periods but the opposite during recession as corroborated by experiences in US.
Is Minimum wage -curse or blessing?
Pros of minimum wage hikes
Minimum wage increases are more likely to deliver income gains to low-skilled workers during peaks rather than troughs in the business cycle. Increases in the minimum wage may stimulate macroeconomic growth if productivity is shifted toward more highly-skilled sectors, possibly by inducing additional training for low-skilled workers. When increases in the minimum wage are indexed to inflation they do not appear to have larger adverse employment effects than non-indexed increases.
Cons of increase in minimum wages
Increases to the minimum wage redistribute the composition of industry-specific productivity in ways that harm some low-skilled workers rather than produce net economic growth. Minimum wage increases reduce employment more for less-skilled individuals during times of macroeconomic recessions as compared to expansions. Minimum wages are not well targeted to poor or near-poor individuals across the business cycle. Minimum wage increases are ineffective at reducing poverty during both business cycle peaks and troughs.
Minimum wage and economic development
Is Minimum wage -curse or blessing?
Pros of minimum wage hikes
Minimum wage increases are more likely to deliver income gains to low-skilled workers during peaks rather than troughs in the business cycle. Increases in the minimum wage may stimulate macroeconomic growth if productivity is shifted toward more highly-skilled sectors, possibly by inducing additional training for low-skilled workers. When increases in the minimum wage are indexed to inflation they do not appear to have larger adverse employment effects than non-indexed increases.
Cons of increase in minimum wages
Increases to the minimum wage redistribute the composition of industry-specific productivity in ways that harm some low-skilled workers rather than produce net economic growth. Minimum wage increases reduce employment more for less-skilled individuals during times of macroeconomic recessions as compared to expansions. Minimum wages are not well targeted to poor or near-poor individuals across the business cycle. Minimum wage increases are ineffective at reducing poverty during both business cycle peaks and troughs.
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