The Effect of Minimum Wage Policy on Poverty Reduction Essay

1 Introduction

Minimal pay policies are widespread throughout the universe. More than 90 % of all states have a minimal pay policy ( International Labour Office. 2009. p. 34 ) . Although the ends of mandating and keeping a minimal pay. such as the decrease of poorness and the creative activity of income equality. are widely accepted around the universe. there is a dissension about the policy’s efficaciousness sing these ends. Oppositions of puting a minimal pay argue that it leads to unemployment. and it does non ensue in the decrease of poorness ( Burkhauser & A ; Sabia. 2007. p. 263 ) . Meanwhile. employment plays an of import function in poorness relief. because it secures income and authorization for the hapless ( United Nations. 2005 ) .

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However. advocates of the minimal pay policy appoint that the policy leads to diminish in poorness rates and the unemployment consequence is non important ( Lustig and McLeod. 1997 ) . That means. there is contention over the usage of minimal pay as an anti-poverty tool. and this makes the subject interesting to analyze. This paper will measure the extent to which the lower limit pay policy is an effectual anti-poverty tool. The rating will be based on literary reappraisals of scientific articles and theoretical stuffs sing the influence of lower limit pay on employment and poorness. Such a focal point is selected because analyzing the consequence of lower limit pay merely on employment does non take to a decision about the influence of lower limit pay on poorness.

Even if the unemployment consequence is moderate. an addition in the minimal pay leads to net income losingss for hapless households ( Neumark & A ; Wascher. 1997. p. 1 ) . In add-on. standards such as the consequence of lower limit pay on employment and poorness degree will be used for rating of efficaciousness of minimal pay policy as anti-poverty tool. The paper will be structured in the undermentioned manner: subdivision two will supply a sum-up of plants related to the subject ; in subdivision three. the selected appraisal standards will be described ; rating and the decision will be presented in subdivision four and five severally. 2 Theoretical model

A few empirical probes were made to happen grounds in favor or against the minimal pay as an anti-poverty tool. There are several research surveies that demonstrate that the minimal pay policy is an uneffective agencies of accomplishing poorness decrease in many instances because of the unemployment consequence. Neumark and Wascher ( 1997 ) conducted one such probe. They studied the consequence of lower limit pay on poorness on the footing of alterations in net income of hapless households. The research workers discovered that raising minimal rewards increases the chance that some hapless households escape poorness and the chance that. ab initio. non-poor households fall into poorness.

The ascertained consequence supposes that the unemployment consequence combined with minimal pay additions causes decreases in the income of antecedently non-poor households ( Neumark & A ; Wascher. 1997. p. 3 ) . The decision of Neumark and Wascher ( 1997. p. 31 ) is that there is no strong grounds to back up the thought that minimal pay policy helps in poorness relief because of the attendant unemployment consequence of lower limit pay. Another research survey was conducted on the footing of Brazilian microdata by Paes de Baros. Carlos. and Samir ( as cited in Gindling & A ; Terrell. 2010 ) . The consequence of the research showed that there was no consequence of the minimal pay on poorness because the unemployment effects of the minimal pay addition.

Pauw and Leibbrandt ( 2012 ) besides decided to look into the efficaciousness of minimal pay as an anti-poverty tool. To look into the influence of the minimal pay policy on poorness in South Africa. they used an advanced micro-simulation theoretical account. which assesses the distribution of employment additions and losingss and the deductions for household income. The consequences showed that minimal rewards led to a fringy diminution of poorness. Furthermore. occupation losingss. monetary value addition and income diminution are more likely to impact the poorest. The research workers found that the minimal pay policy targets a little fraction of the hapless.

As such. they concluded that the policy was non an effectual tool in South Africa because it was non good targeted ( Pauw & A ; Leibbrandt. 2012. p. 780 ) . However. there are few empirical research surveies that prove that the minimal pay policy reaches the hapless. The first estimations on the consequence of lower limit rewards on poorness were made in the United States by Card and Krueger ( as cited by Gindling & A ; Terrell. 2010 ) . They used arrested development analysis to analyze the alteration in the poorness rate of provinces from 1989 to 1991 and took into consideration merely a little fraction of workers who were influenced by the minimal pay addition. The research workers found weak grounds of a modest poorness decrease consequence because of the minimal pay addition. Lustig and McLeod ( 1997 ) besides investigated the consequence of the minimal pay on poorness but in Latin America and Asia.

They concluded that an addition or autumn in minimal pay leads severally to a diminution or addition in the poorness rates in developing states ( Lustig & A ; McLeod. 1997. p. 81 ) . However. it was besides noticed by the research workers that an addition in the lower limit pay could increase somewhat unemployment. ( Lustig & A ; McLeod. 1997. p. 77 ) . In add-on. they mentioned that even if the lower limit pay is shown to cut down poorness in the short tally. employment chances could diminish in the long tally.

The consequence of research by Saget ( 2001. p. 22 ) shows that an addition in minimal pay reduces poorness ; nevertheless. for a set of Latin American states. where arrested development analyses were made on the footing of a one- or two-dollar poorness line. there was no consequence on the poorness degree. Furthermore. they remark that the consequence confirms their intuition that minimal rewards in developing states do non act upon the poorest population but the low-income population of the upper degree alternatively. The empirical research of Gindling and Terrell ( 2010 ) sing the influence of lower limit pay on poorness in Honduras provided grounds that a rise in the lower limit pay had a modest poverty-reducing consequence.

The consequences are true for the formal sector and could be higher. if there was no the unemployment consequence in the formal sector. Furthermore. the research workers suggested that those who lost occupations likely found occupations in the informal sector. where the lower limit pay ordinance does non keep power ( Gindling & A ; Terrell. p. 915 ) . Although in the bulk of surveies above. the unemployment consequence of the minimal pay policy is mentioned. Card and Kruger ( 1994. In: Ropponen. 2011 ) discovered that a minimal pay addition can take to an addition in employment. Such grounds they received by look intoing fast nutrient eating houses in New Jersey in 1992. Therefore. there are several surveies that provide grounds both in favor and against the minimal pay policy as anti-poverty tool.

3 Criteria Two standards were selected for the rating of the extent to which the lower limit pay is an effectual tool for poorness relief: They are the influence of the minimal pay on the poorness degree and its consequence on the employment of the hapless. The measurement of the consequence of the minimal pay on the poorness degree supposes concentrating on the passage into poorness and out of poorness and the alterations in poorness rates. Such a focal point follows from the analysis of theoretical models. where research workers used poorness rates ( Gindling & A ; Terrell. 2010 ) or passages out or into poorness for the rating of the influence of the minimal pay on poorness ( Neumark & A ; Wascher. 1997 ) .

The employment consequence of lower limit pay standard was selected because in the theoretical model. the employment consequence seems to be a critical factor that identifies the effectivity of the minimal pay as an anti-poverty tool. For illustration. Samir. ( as cited in Gindling & A ; Terrell. 2010 ) references that there is no consequence of the minimal pay policy if the employment consequence additions. These standards will be applied by happening in the empirical probes the grounds of the negative or positive alterations in the poorness degree and employment or the grounds of the absence of matching minimal pay influences. After that. grounds will be weighed. and a determination about the effectivity of keeping a minimal pay will be made.

4 Evaluation

Although economic experts agree that the primary end of minimal pay policy is poverty relief. many disagree about its effectivity as an anti-poverty tool. as shown in subdivision 2 of this paper. In this subdivision. statements for and against the policy were compared utilizing standards from subdivision 3. measuring the extent to which minimal pay served as an effectual anti-poverty tool.

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