Case Study of the Minimum Wage Increase in California: A Normative Case Against Minimum Wage Policies

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A minimum wage is a price floor that is enacted upon labor market in order to increase the wages of workers. Supporters of increasing the minimum wage believe it will alleviate poverty while critics believe that these well-intentioned policies create inefficiencies in the market that ultimately harm the poor. As with many cases where the government attempts to set a price floor to aid a segment of society, a conflict between normative values and positive economics takes center stage. However, it is possible to bridge the gap the bridge between the conception of how economic policies should work and how they actually work in order to assess the merits of minimum wage. By evaluating the recent California minimum wage increase from both a normative and positive standpoint, minimum wage laws can be determined to be detrimental to the poor because they fail to remedy market exploitations while causing inefficiencies in the labor market that have an adverse impact on low wage workers.

Case Overview

The Los Angeles Times reported that California Governor Jerry Brown signed legislation that would make a two-part increase to the minimum wage that would be increased to $9 per hour by July 1, 2014 and to $10 per hour by January 1, 2016 (Li 2013). Upon signing the legislation, Governor Brown stated that increasing the minimum wage was a “moral responsibility” and asserted that the disparity between wealthy and low-wage earners necessitated the legislation (2013). Further, Brown asserted that a potential increase in prices was a worthwhile tradeoff because it ensured that workers could enjoy a better standard of living (2013). Brown’s statements reflect the normative positions of minimum wage supporters.

However, the legislation received criticism from many business organizations. The California Restaurant Association and the California Chamber of Commerce are among the coalitions of employers that publically criticized the new minimum wages (2013). The organizations asserted that an increase in the minimum wage would force them to raise their prices and fire workers to compensate for the increased costs of labor (2013). Further, a general manager of a Burbank real estate firm commented that he would hire fewer students over the summer because of the minimum wage laws (2013). The commentary provided by the business community reflects the concern that minimum wage laws would force them to reduce their demand for labor in order to lower their costs.

This case demonstrates the conflict between normative and positive values that are inherent in economic policy. Demonstrating the normative approach to reviewing economic issues, those in support of the minimum wage believe that the wage should be increased because wages are a reflection of societal equity. However, businesses take a positive approach that focuses on the actual economic impact that increasing the price floor on the labor market would have. As this conflict demonstrates, the differences between normative and positive approaches to analysis must be reconciled in order to make a thorough assessment of California’s recent minimum wage increase.

Methodology

The methodology used in this case study consists of a literature review that will present normative and empirical tools for assessing the impact of minimum wage laws. First, this study will assess the underlying values that inform minimum wage laws. Further, a normative approach to analyzing the case will be established. Second, this study will utilize an empirical study to construct a positive analysis that reviews the real effects of minimum wage laws. Employing a normative and positive assessment of the minimum wage will facilitate a qualitative analysis of this case.

Case Analysis

As the Los Angeles Times article reveals, Governor Jerry Brown utilized a normative approach to rationalizing an increase to the minimum wage. Thus, it is necessary to develop a framework for assessing minimum wage policies from a similar perspective. Wilkinson (2004) develops a normative framework for evaluating minimum wage policies through a consequentialist approach (p. 353). As Wilkinson acknowledges, raising wages could combat monopolistic practices in the labor market among large firms or encourage companies to increase productivity to compensate for increased labor costs (p. 355). However, the shortcoming of these observations is that they assess the value of minimum wage increases by considering the benefits that firms obtain.

Wilkinson agrees that a normative assessment must focus on the population that minimum wage and employment laws are intended to assist. He argues that the only proper way of assessing minimum wage from a normative value is by assessing the effects that minimum wage will have on jobs and wages of the poorest members of society (p. 354). This ensures that the results are aligned with the values that one is attempting to promote. As Wilkinson notes, many supporters of minimum wage support minimum wage increases because they believe that it prevents the exploitation of workers (2004, p. 354). However, the focus on exploitation is insufficient because there is a possibility that minimum wage earners are not poor, thus not victims of exploitation (2004, p. 361). Because the extent to which low-wage workers are exploited is difficult to assess, a meaningful normative analysis must only consider the results of minimum wage policy as it relates to the condition of the poor.

As Wilkinson’s framework establishes, consequentialism enables a positive analysis to become compatible with normative considerations. Sabia and Burkhauser (2010) provide empirical analysis that supports normative analysis of minimum wage laws. Their study of state and federal minimum wage increases between 2003 and 2007 concludes that minimum wage laws had a net effect of lowering the economic participation of the poorest members of society (2010, p. 600). This finding aligns with neoclassical theory, which posits that minimum wage laws result in reduced demand for low-skilled labor (2010, p. 594). Further, they found no evidence that minimum wage laws increased poverty rates (2010, p. 593). Rather, the majority of individuals who benefited from the increase were second jobholders and members of household that have incomes twice or three times the poverty line (2010, p. 593). These findings establish from a normative and positive standpoint that increases to the minimum wage are undesirable because they fail to uphold the values of assisting the poor and may indeed have a detrimental effect on poor laborers.

Conclusion

The conflict between the normative and positive approach to analyzing economic policies demonstrates that no economic issue is free from the consideration of values. Support for raising the minimum wage is often a statement on how supporters believe that the poor should fair in society. However, even seemingly beneficial policies can be rejected from a normative standpoint when an evaluation of their consequences review that they undermine the values they wish to uphold. As empirical research demonstrates, California’s increase to the minimum wage should be cautioned against from a normative and positive standpoint because it could potentially undermine the participation of the poor in the labor market while failing to achieve its purpose of promoting equity in society.

References

Li, S. (2013, Sep. 25). Gov. Brown signs bill to raise minimum wage to $10 an hour by 2016. Los Angeles Times. Retrieved from http://www.latimes.com

Sabia, J.J., & Burkhauser, R.V. (2010, Jan.). Minimum wages and poverty: Will a $9.50 federal minimum wage really help the working poor? Southern Economic Journal, 76(3), 592-623. Retrieved from JSTOR database.

Wilkinson, T.M. (2004). The ethics and economics of minimum wage. Economics and Philosophy, 20, 351-374. Retrieved from JSTOR database