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Paper Topic:

Minimum wage

Economic Effect of Minimum Wage on Employment


The feel good ' effect of a high minimum wage is considered a good thing by most voting Americans . Many believe that the government has the right idea in intervening in market forces to help those living in or below the poverty line a better life by providing a minimum wage law What many Americans are not aware of is the negative consequences of a wage rate incompatible with market forces

The primary reason for establishing a minimum wage is to assure the working

poor with adequate income . However , the law focuses on wages not employment , and while if one is employed one is assured of at least the minimum wage , those who find themselves disemployed or unable to gain employment because of the law become poverty statistics and is not reflected in the formation of such legislation . Moreover , wages do not guarantee an increase in productivity , merely an increase in cost , so it generally benefits only a relatively small population (Deere , Murphy and Welch , 1995

It was actually in June 1933 that the National Industrial Recovery Act established the first federal minimum wage of 30 to 40 cents per hour for 515 classes of labor under the National Recovery Administration However , the NRA discovered that the law had deleterious effects causing the unemployment of approximately half-a-million Negro workers The law was declared unconstitutional by the Supreme Court on May 27 1935 . According to NRA director of research C .F . Roos , the law displaced young , inexperienced and old workers (Rustici , 1985

The Supreme Court decision in the 1937 West Coast Hotel v . Parrish case upheld the Washington State minimum wage law and served as a precedent for subsequent minimum wage legislation . By June 25 , 1938 , President Roosevelt signed the Fair Labor Standards Act (FLSA ) into law (Rustici 1985

This provides an overview of the published evidence using empirical data which supports the opinion of many economists which state that a minimum wage law distorts free market forces and that increases in the minimum wage will result in increased unemployment for at-risk populations , specifically young , low-skilled , low-wage , minority group workers . It will also peruse the literature which provides an explanation for the apparent contradiction of established economic theory in the passing of minimum wage legislation

Government intervention and the Fair Labor Standards Act

It was Thomas Jefferson who stated that in the governance of people in a truly liberal society , government "shall leave them otherwise free to regulate their own pursuits of industry and improvement (Dorn , 2007

Theoretically , economists insist that establishing a minimum wage is undesirable , and historically , the statistics for the actual economic events with regard to minimum wage appear to bear out this conclusion

It is surprising therefore that since its inception in 1938 , the minimum wage law has not been abolished in fact , it was broadened in scope and the minimum wage has increased twenty times since then

George Stigler opines that economists are consistently ignored in the creation...

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