Considering the government’s announcement to increase the minimum wage from $210 to $250 per week, this segment will explore what this increase means for the economy, workers, and employers.
A minimum wage is the lowest wage permitted that employers could pay workers by law. The topic of a minimum wage is often controversial among unions and has created somewhat of a divide between politicians and economists. We will look at what discussions are held in these circles.
The purpose of the minimum wage has always been to help stabilize the economy and protect workers in the labor force. The minimum wage was designed to create a minimum standard of living to protect the health and well-being of employees. The minimum wage can drive activity in the domestic economy and create new startup opportunities. For instance, an increase in the minimum wage can help families to improve the quality of life for their household members, even if it as simple as keeping the Internet on for online learning or providing better lunches on a consistent basis.
However, some economists argue that the minimum wage does not achieve stabilization in the economy. The reason behind this thinking is linked to demand and supply. If the price for a good or service goes up, the demand begins to decrease. In the case of the minimum wage, if the cost of labor increases, then the demand by employers begin to decrease. The decrease in desire by employers to not hire workers leads to unemployment.
In a real-world context, businesses want to remain profitable and sustainable. Therefore, an increase in the minimum wage might lead to a sharp increase in wages/salaries that some businesses are not willing to absorb. As a result, businesses can increase the selling price of their goods and services or replace jobs with advanced technology. But an increase in the minimum wage is not the only reason why businesses increase prices, other factors include cost of living, inflation, additional taxes and other macro-economic conditions.
Impact of increasing
Generally, the working class has always argued that increasing salaries would help to manage the rising cost of living. The cost of living is an index that is calculated by comparing the prices of a range of goods and services on which consumers spend their money. However, the cost of living and the minimum wage do not change simultaneously. In fact, since the early 1990s, the minimum wage has only increased three times in the past three decades in the USA. That is because increases in the minimum wage is not always linked to productivity or the inflation rate. So, will increasing the minimum wage help to offset the rising cost of living in a real-world context?
Some studies have found that increases in the minimum wage resulted in workers having to work more jobs or more hours to make up for a 40-week work schedule, since businesses would reduce the number of hours an employee can work, ensuring that just the minimum wage is met. This occurs because when the minimum wage increases, more layoffs also occur since the compensation budget does fit the same number of employees at a higher rate for the minimum wage. Employers will also consider hiring less because they simply can’t hire the same number of staff if salaries must increase.
There is also the possibility of prices for a service/good increasing to shore up salary costs. So, even though the minimum wage supports economic stimulus since minimum wage workers have more money to spend, businesses might raise the prices of their products to generate
enough income to support the increase in wages. Another lens is that raising the minimum wage could result in more opportunities for jobs, since more spending requires businesses to hire more employees to keep up with increased sales from consumers buying more. But this may not always occur, since businesses can keep the same amount of employees to manage costs and add an element of technology or a machine to help assist.
Impact on Bahamian businesses
We have heard from the Bahamian public that an increase of $350 to $500 is more of an acceptable amount for minimum wage versus the proposed $40 increase. We also know that raising the minimum wage must be justified and is usually tied to periods of inflation. The recent increase in inflation is driven by supply chain disruptions and pent-up consumer demand for goods following the reopening of the economy in 2021. Therefore, we have revisited the topic of increasing inflation. But how will Bahamian businesses respond to this hike?
To understand this response, we should consider the following:
1. We should first know how many businesses are already paying above the minimum wage amount. If businesses are forced to pay higher minimum wages, this might discourage businesses to hire new workers, since it no longer fits their compensation budget.
2. Less economic opportunities for new market entrants such as college graduates who want to have experience. Businesses could just shift or consolidate resources to ensure that higher paid workers cover business needs instead of hiring new workers.
3. The quality of services and goods may decline because productivity does not show continuous improvement. If workers are already making more than minimum wage, they will be confident and secure in their jobs, especially in hard economic times. On the other hand, businesses may have to spend more on training and wages for new employees coming in as minimum wage workers.
At an enterprise level, increasing the minimum wage has the ability for workers to become more motivated and incentivized to work. This new motivation could translate to increased productivity. However, it may also make minimum wage earners comfortable to the extent that no new skillsets are applied to the business. Increasing the minimum wage and not reducing the cost of living may only encourage low skilled workers to become comfortable with earning more while doing less. This also makes it more difficult for employers since the asking price for more skilled workers can also increase.
In closing, an increase in the minimum wage should be a standalone move in hopes to achieve economic growth or stability. It is only a patch to the bigger issues we face as a country. There is still a lot we need to do to diversify the economy, which largely requires making our learning population more competitive. Overall, it won’t hurt to have more money in our pockets but as the cost of living continues to increase, giving handouts is not a real and feasible solution. We need to focus on how to reduce the cost of living by using the resources we currently have and building on them. Until then, $250 is better than zero.
• Roderick A. Simms II is an advocate for sustainable family island growth and development. Email: RASII@ME.com.