The Effect of Minimum Wage Policy on Poverty Reduction Essay Example for Free

The Effect of Minimum Wage Policy on Poverty reduction Essay1 IntroductionMinimum pursue policies are widespread throughout the world. More than 90% of all countries have a borderline earnings insurance indemnity (International Labour Office, 2009, p. 34). Although the goals of mandating and maintaining a tokenish engage, much(prenominal) as the reduction of scantiness and the creation of income equality, are widely accepted around the world, at that place is a dis check offment about the constitutions efficacy regarding these goals. Opponents of setting a negligible prosecute implore that it leads to un commerce, and it does not result in the reduction of meagerness (Burkhauser Sabia, 2007, p. 263). Meanwhile, employment plays an important role in privation alleviation, because it secures income and empowerment for the poor (United Nations, 2005).However, proponents of the minimum occupy policy appoint that the policy leads to decrease in meagreness rates a nd the unemployment entrap is not significant (Lustig and McLeod, 1997). That means, there is controversy over the use of minimum rent as an anti-poverty tool, and this makes the topic interesting to study. This paper will evaluate the uttermost to which the minimum affiance policy is an effective anti-poverty tool. The evaluation will be based on literary reviews of scientific articles and theoretical materials regarding the make for of minimum net profit on employment and poverty. much(prenominal) a focus is selected because studying the effect of minimum plight only on employment does not lead to a conclusion about the learn of minimum wage on poverty.Even if the unemployment effect is moderate, an make up in the minimum wage leads to moolah income losings for poor families (Neumark Wascher, 1997, p. 1). In addition, criteria such as the effect of minimum wage on employment and poverty level will be used for evaluation of efficacy of minimum wage policy as anti-povert y tool. The paper will be structured in the following way section devil will provide a summary of works related to the topic in section three, the selected sagaciousness criteria will be described evaluation and the conclusion will be presented in section quartet and five respectively. 2 Theoretical frameworkA few observational investigations were made to find evince in spare or against the minimum wage as an anti-poverty tool. There are several seek studies that demonstrate that the minimum wage policy is an ineffective means of achieving poverty reduction in many another(prenominal) cases because of the unemployment effect . Neumark and Wascher (1997) conducted one such investigation. They studied the effect of minimum wage on poverty on the basis of changes in net income of poor families. The exploreers discovered that raising minimum wages pluss the probability that slightly poor families escape poverty and the probability that, initially, non-poor families fall into poverty.The discovered result supposes that the unemployment effect combined with minimum wage increases causes reductions in the income of previously non-poor families (Neumark Wascher,1997, p. 3). The conclusion of Neumark and Wascher (1997, p. 31) is that there is no strong rise to support the head that minimum wage policy helps in poverty alleviation because of the concomitant unemployment effect of minimum wage. some other research study was conducted on the basis of Brazilian microdata by Paes de Baros, Carlos, and Samir (as cited in Gindling Terrell, 2010). The result of the research showed that there was no effect of the minimum wage on poverty because the unemployment effects of the minimum wage increase.Pauw and Leibbrandt (2012) as well as decided to check the efficacy of minimum wage as an anti-poverty tool. To investigate the bewitch of the minimum wage policy on poverty in to the south Africa, they used an advanced micro-simulation model, which assesses the dis tribution of employment gains and losses and the implications for household income. The results showed that minimum wages led to a marginal defy of poverty. Moreover, job losses, price increase and income decline are more likely to affect the poorest. The investigators found that the minimum wage policy targets a small fraction of the poor.As such, they concluded that the policy was not an effective tool in South Africa because it was not well targeted (Pauw Leibbrandt, 2012, p. 780). However, there are few empirical research studies that prove that the minimum wage policy reaches the poor. The first estimates on the effect of minimum wages on poverty were made in the United States by Card and Krueger (as cited by Gindling Terrell, 2010). They used regression analysis to examine the change in the poverty rate of states from 1989 to 1991 and took into consideration only a small fraction of workers who were influenced by the minimum wage increase. The researchers found weak evidenc e of a modest poverty reduction effect because of the minimum wage increase. Lustig and McLeod (1997) also investigated the effect of the minimum wage on poverty but in Latin the States and Asia.They concluded that an increase or fall in minimum wage leads respectively to a decline or increase in the poverty rates in developing countries (Lustig McLeod, 1997, p. 81). However, it was also noticed by the investigators that an increase in the minimum wage could increase slightly unemployment. (Lustig McLeod, 1997, p. 77). In addition, they mentioned that even if the minimum wage is shown to reduce poverty in the short run, employment opportunities could decrease in the long run.The result of research by Saget (2001, p. 22) shows that an increase in minimum wage reduces poverty however, for a set of Latin American countries, where regression analyses were made on the basis of a one- or two-dollar poverty line, there was no effect on the poverty level. Moreover, they remark that the re sult confirms their intuition that minimum wages in developing countries do not influence the poorest population but the low-income population of the upper level instead. The empirical research of Gindling and Terrell (2010) regarding the influence of minimum wage on poverty in Honduras provided evidence that a raise in the minimum wage had a modest poverty-reducing effect.The results are true for the formal sector and could be higher, if there was no the unemployment effect in the formal sector. Moreover, the researchers suggested that those who lost jobs probably found jobs in the informal sector, where the minimum wage regulation does not hold power (Gindling Terrell, p. 915). Although in the majority of studies above, the unemployment effect of the minimum wage policy is mentioned, Card and Kruger (1994, In Ropponen, 2011) discovered that a minimum wage increase can lead to an increase in employment. Such evidence they received by investigating fast food restaurants in newly J ersey in 1992. Thus, there are several studies that provide evidence both in favour and against the minimum wage policy as anti-poverty tool.3 Criteria Two criteria were selected for the evaluation of the extent to which the minimum wage is an effective tool for poverty alleviation They are the influence of the minimum wage on the poverty level and its effect on the employment of the poor. The measuring of the effect of the minimum wage on the poverty level supposes focusing on the transition into poverty and out of poverty and the changes in poverty rates. Such a focus follows from the analysis of theoretical frameworks, where researchers used poverty rates (Gindling Terrell, 2010) or transitions out or into poverty for the evaluation of the influence of the minimum wage on poverty (Neumark Wascher, 1997).The employment effect of minimum wage criterion was selected because in the theoretical framework, the employment effect seems to be a critical divisor that identifies the mil itary strength of the minimum wage as an anti-poverty tool. For example, Samir, (as cited in Gindling Terrell, 2010) mentions that there is no effect of the minimum wage policy if the employment effect increases. These criteria will be applied by finding in the empirical investigations the evidence of the negative or positive changes in the poverty level and employment or the evidence of the absence of corresponding minimum wage influences. After that, evidence will be weighed, and a end about the effectiveness of maintaining a minimum wage will be made.4 EvaluationAlthough economists agree that the primary goal of minimum wage policy is poverty alleviation, many disagree about its effectiveness as an anti-poverty tool, as shown in section 2 of this paper. In this section, arguments for and against the policy were compared using criteria from section 3, evaluating the extent to which minimum wage served as an effective anti-poverty tool.