The Wage Cage

An increase in minimum wage levels and the debate over whether the poverty levels of a country can finally plummet or not are important topics of discussion amongst economists. The camp is divided into two sections, with some agreeing with the idea and labelling it as effective, while others arguing that it will lead to quick, long-term drawbacks such as inflation and even fear of job losses. Then, there is a minority community that doesn't have a response but believes that the people do not see the point, and there is no simple solution to such a gaping problem. Poverty is a problem faced by most of the developing countries. At first glance, yes, the increase in minimum wage can curb poverty levels. The policy will especially be effective in the formal sector of the economy, where most activities are documented and legislations are enforced. However, the loopholes in the system are numerous, which makes the idea ineffective in the larger picture, especially for such countries.

As previously explained, an increase in minimum wage targets the formal sector, and while this is advantageous, it will have a negligible impact on the country as a whole. In a country like India itself, more than half the economy falls under the informal sector. Moreover, at least ninety per cent of the total workforce is employed in this sector. The problem arises as policies go unenforced in this sector due to its number of people and non-rigid laws. As a result, even if the scheme is assumed to be effective, it will not impact even half the population and will not lead to a change overall. Small increases can push workers who already earn near the minimum wage level above the poverty line, but cause job losses throughout the nation.

According to sources, a full-time worker earning the federal minimum wage of $7.25 per hour brings home just $15,800 a year, below the poverty line for a family of two. Raising it to $10.10, according to the Congressional Budget Office, could lift 900,000 people out of poverty. But it might also cost 500,000 jobs. Even in formal sectors, an increase in minimum wage can unintentionally harm low-skilled or younger workers as job opportunities may begin to close out. Not only that, but most minimum wage workers do not even come from poor household backgrounds. Almost 81% of the wage gains would go to people not facing low-wage issues. Targeting will make the process much more difficult. Eventually, this policy will go against its standard principle, which is to help the younger population gain some entry-level work experience. 

Additionally, inflation poses a huge threat. With wages increasing, the expenditure also increases. This leads to a higher demand among people for the supply. Soon, prices of products skyrocket, leading to huge economic losses. In wealthier areas, nominal increases in wages don't have these horrendous effects. However, in the lower section of society, money is tight, and the smallest changes lead to increases in business hours, job losses, and shutdowns as well. While an increase in minimum wage may seem like the way to go, a concept to understand is that poverty is not just about an increase in money. Poverty is the sort of experience which stops people from advancing due to the various financial burdens and human needs. For example, a teenager from a lower background does not need a high starting wage but a mentor to guide him to success; he needs someone to teach him how to fish for independence. Therefore, the solution to poverty is not truly just an increase in wages. Solving this issue with an increase will only look good for some time, with ugly ramifications. 

Instead, systematic change needs to be brought about - programmes like the Earned Income Tax Credits (EITC), affordable housing, quality education and better healthcare. It is not the money that is required, but flexibility in the system as a whole, which allows those, even earning below the minimum wage level, to be able to survive in the dangerous flow of life. Complementary policies need to be enforced with this idea to ensure complete safety, and so that ‘minimum’ does not become the norm, but just an exception. Ultimately, poverty cannot be solved with a single policy; it requires an amalgamation of various ideas, working like a mechanism with one another. Yes, minimum wage can stabilise households for some time, but can we sustain all the issues society will face because of an increase? While a minimum wage increase is a step, to truly end poverty, we need a new and refurbished system.