Essay on Negative Effects of Raising Minimum Wage

Most of exchanges of goods and services, in modern times, said to be dictated by the ‘law of supply and the law of demand’. The former being that as prices rise the greater the number of suppliers, willing and able to supply and the later, as price rise, the fewer the number of people willing and able to buy the good. The interaction of the two laws leads to the market equilibrium i.e. the point at which demand and supply meet. If there is excessive demand for a certain service or a product the price, therefore, increases. This triggers an increase in supply so that suppliers benefit from the rising price and people’s wants. This law is reflected in the labor market. If there is an excess of workers in the market, meaning that fewer companies wish to hire workers than there are workers available, the price of the labor will diminish and vice versa. This is because each individual worker is less valuable to the firm as they have alternatives. Nowadays, several governments in several different countries have adopted a minimum wage policy. The minimum wage can be defined as “the smallest amount of money that employers are legally forced to pay someone who works for them”. This set of rule guarantees a certain amount of money that a worker will receive for their labor. Any minimum wage is intimately connected to the economy of a community. Thus, changes to the minimum wage have knock-on effects for the local community. Increasing the minimum wage will, arguably, bring out drastic negative repercussions for whichever society. It can ultimately cause a decrease the number of jobs available in the local community and it may also cause firms and companies seek to relocate to areas with a lower minimum wage.

The most salient (and widely accepted) argument against the minimum wage, is that raising it will lead to depriving those most in need of job positions. Whilst the minimum wage does guarantee workers that they will receive at least a certain amount, this is only helpful for those in employment. Although this insurance of a certain amount of wage might seem enticing, its effect will likely be more detrimental than positive in the long run. Employers will dislike the increasing price they have to spend on labor. In order to combat this, they may choose to have fewer workers working for the business, so as to maintain the same costs as before the introduction of/change to the minimum wage. Even a thriving business that has more than enough orders to make products and render services, ultimately, the fall in the size of the workforce will prevent the business to further expansion and profit. As the minimum wage increases, numerous people working a part-time job, or people with mini-jobs will have a high probability of losing their work, as they are less valuable to the firm than full-time workers. Owners will forgo employing local workers in favor of immigrants, who are often cheaper. The increased minimum wage will likely force the employers to maintain more valuable workers who are better paid by letting go part-time job workers. They may even choose to pursue a nepotistic strategy, keeping their family members employed. This will definitely prove devastating for who are newly redundant. Furthermore, the general price level of goods tends to rise as the minimum wage goes up. Food, rent, groceries, beverages and the price of several other necessities will increase which will only serve to worsen unemployed people’s vulnerable economic status. People who lost their job in due to the increased minimum wage may be forced to relocate to an area with a lower minimum wage and/or lower living prices. This brain drain will lead to a severe resentment from low-wage workers and intensify the polarization of the ‘haves and the have-nots’ since people with high-skill sets and who get paid enormous wage do not get affected by an increased minimum wage.

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When considering this controversy, a great epitome of this could be the situation in South Korea. The intense increase in minimum wage is currently viewed as an obstacle that deters any advancement to South Korea’s economy. South Korea’s economic structure is rather different from that of the US, and that of its wealthy European counterparts. The vast majority of the country’s GDP is attributed to the overseas economic activity by the conglomerates like Samsung, Hyundai and others, and yet a significant number of people are self-employed. This is due to the fact that many choose to retire or are let go well before the mandatory retirement age of fifty-five. Many of these workers set up their own business rather than seeking out another employer. Some of the most popular ventures include but are not limited to: a personal cafe, fried-chicken delivery company, a restaurant. These businesses usually consist of only an owner and several part-time workers who work for the minimum wage. If the minimum wage is artificially placed at a high price and continues to rise, it will damage all these self-employed businesses. With minimum wage still rising, the owners will not be able to afford to keep as many employees as before, leading to nationwide layoffs of part-time and ‘mini’ jobs. This has been observed in South Korea with the introduction of the government’s economic plan: The Wage-led Growth policy. It saw a 16.4% rise in the South Korean minimum wage, the steepest rise in South Korean history. The policy has been unpopular as seen in the manufacturing sector. The number of factory workers decreased by 79,000 in May 2018. One thing that sets the Korean economy apart from others is a large number of part-time job workers and ‘mini’ jobs. According to Statistics Korea (KOSTAT), in the first quarter of 2018, the number of people working fewer than 36 hours was 4,150,000, the highest rate of all time. It is hardly up for debate that the ‘mini’ job is the new trend in the labor market of South Korea. People who worked fewer than 18 hours per week increased from 1,324,000 to 1,426,000, i.e.7.8%. Whilst these ‘mini’ jobs and part-time workers are getting paid with minimum wage, the radical increase of minimum wage led to businesses to lay-off several workers. Which in turn causes a rise in a number of self-employed workers or machines. As mentioned above, a rise in minimum wage inevitably leads to a rise in the price of every single good and service within a said economy. According to Korea Consumer Agency, the price of processed foods, such as soft drinks rose 11.9%, as did pork belly (5.6% rise of price) - a food staple in South Korean cuisine. The quality of life for the workers may have been enhanced due to their better salary. However, countless self-employed businesses are shutting down and laying off workers. This proves that a minimum wage is not a universal fix all. The nature of the South Korean economy shows a group that is by no means negligible are worse off. The collapse of these self-employed owners means the collapse of Korean-middle class. The debts from these self-employed individuals have reached nearly $300,000 per person, a figure derived from the division the total debt of self-employed startups by a number of business owners. The total amount is $465,594,280,607, and by dividing this by the 5,600,000 self-employed owners leads to $300,000 per a self-employed owner. If half of these self-employed people shut their business down and are unable to repay the debts, the Korean economy will struggle drastically, as these startups form a significant part of the economy. If these companies were to default payment they would face bankruptcy, putting the whole economy in a weaker position. This case shows a devastating effect that happened in the Korean community, in the nation as a whole.

When taking in to account the global implications, the problem and controversies surrounding the minimum wage prove not only to be a South Korean issue but rather a global one. This can be seen by the radical increase in the minimum wage in Seattle, in the United States of America. In 2014, the Seattle state increased its minimum wage from $9.47 in 2014 to $11 in 2015, and later $15 in 2017. This case is particularly interesting as it attracted international attention and sparked debate as to the benefits or disadvantages of the decision. The Seattle state, like the South Korean government, had intended to cause income-led growth, stating that “boosting the quality of low-skilled, low-wage workers will trigger an increase in consumption, eventually spurring the whole economy”. Many of the workers were not paid enough when considering the high price-index in Seattle - a significant driving force behind the government's drastic plan. After observing the consequences for three quarters in 2016, the Washington University concluded that low-skilled workers were operating in Seattle regardless of which industry. The workplace unit decreased about 7% in the short period of time and the working hour decreased 9.4%, in spite of the rise in wages. The crucial takeaway is that the change in workers’ monthly wage actually fell: it decreased 6.6%, which is about $125 per month for a worker. The average of low-skilled, low-wage workers monthly wage declined from $1,897 to $1,772 declining $125. Monthly wage diminishing $125 per month is not a trivial, subtle change that could be ignored when considering the amount of wage, they receive in a month. Especially when taking into account the rise in the cost of necessities such as buying foods at the grocery store and living expense ultimately leaving workers in a more desperate and worse position than before. Professor Jacob Vigdor, from Washington University, concluded in this research that increasing the minimum wage had not worked out well in the past, where most of the people had their job in manufacturing factories. Ensuring their wage, leading to their consumption and superior living quality, will lead to a better economy of a nation. However, circumstances and the structure of the economy is completely different in this modern day, where most people work in a service industry and part-time jobs, concluding that blindly raising the minimum wage will backfire and be harmful to the economy, as was the case in the United States.

When looking at the example of city Seattle, the increase in minimum wage triggered a deficit as it did in other countries. Considering the particular structure of the Korean economy i.e. the independence of workers, the sharp rising of minimum wage definitely seems to be more harmful compared to some positive effect it brings to the community.