“Optimal” Minimum wage Policy

“Optimal” Minimum wage Policy


This paper discusses the theory behind attaining what is termed as “Optimal” minimum wage for the United States. The article tries to address a way of achieving the most favorable minimum salary. However Considering the welfare of low-income earners, the minimum wage should be increased in a way that the labor force is not underpaid. However, its increase may result in effects on economic equilibrium. The objective of designing that equilibrium in minimum wage earning is broken down into sections and explained with additional evidence from relevant journal and articles.


The main aim of reaching an optimal minimum wage is so that the low-income earners can get a fair share of their work within the competitive labor market that is the United States. However, the implementation of this policy comes with its pros and cons. Several countries have tried to enact the “Optimal” minimum wage policy among them being Malaysia (Nurrachmi et al. 2012).

The concept of the minimum wage has had many controversies. It considered as a useful redistribution tool as it leads to an increase in the low skilled income earnings. However, its action has affected the factors of production, for instance, the higher skilled laborers or the capital. It also results in unemployment making it hard for those who fall victim of losing their job. According to the assumption known as “efficient rationing” adopted by (Saez, 2008)minimum wage induces employment that affects the low-income earners first.

In the past decades, the United States labor market has been characterized by stagnated low wages among the low-skilled workforce as well as an increasing inequality in earnings. As a result, there have been attempts to enact minimum wage policies with the objective of raising income earning among the low-skilled labor. However, this can only be achieved at the expense of unemployment. On a brighter side, there can be a way to attain an optimal minimum wage through the use of a tax system. Accomplishing the redistribution will, however, come with is trade-offs as there is limitation through fiscal constraints. Therefore, designing an “optimal” scheme will be affected by how the tax system and minimum wage interact (Lavecchia, 2018)

This paper talks the way forward in designing an optimal minimum wage for the U.S. It is divided into sections among them including, justifying why the scheme is optimal, the objectives of the programme, the prevailing impediments to achieving the goal, the winners and losers basing on current policy and finally the how will the plan affect the US revenue.


Optimal minimum wage

The attainment of an acceptable minimum wage is not that easy as there are tradeoffs that need to e made otherwise it may have a detrimental impact on the US economy. However, the optimal condition can be reached through the following objectives. Poverty reduction through an increase in the low-skilled income level, ensuring labor marketing to minimize the rate of employment while increasing profit with the help of the available worker. Lastly, provide there is growth in productivity. This design aims to accomplish the above objectives, and henceforth, it can be termed optimal as it bridges the issues that may have resulted from a typical minimum wage like unemployment while ensuring that the welfare of the low-skilled workforce is catered for. These objectives are discussed below. It is evident, however, that the government has made an effort to increase the minimum wage as observed over the years. The federal minimum was increased from $2.90 in 1979 to $7.25 in 2009 (BLS, 2018)

(I)  Poverty reduction

To attain an optimal minimum wage, the scheme should be able to address poverty among low- income laborers. Ann increment in salaries in inversely proportional to debt that is higher wage results to decrease in poverty and vice versa. However, this is not always true, although it leads to an increase in salary for the specific workers, it does not guarantee equity improvement in the general population. Also, there are others who argue that minimum wage can be contributed by factors such as constraint within the business environment, poor technology for production among others(Nurrachmi et al. 2012).

Increase in wages can be a motivational factor thereby making workers harder and also creates a lasting employee-employer relationship. Furthermore, increasing fees makes workers want to continue working for their employers. This has a positive effect on productivity as employers are saved the hustle of acquiring new workers who are less experienced.

However, poverty reduction cannot be achieved if there is a high cost of living, This is because, a more significant portion of the wage will be used to meet expenses such as food, medication among others, leaving an individual with nothing to save or invest.

(ii) Promote productivity

This objective is focused on the firms. Through the adoption of the optimal minimum wage, firms will be required to boost their production techniques to increase production level in the aim of maintaining profit. However, not all firms will react positively to this change. Although others may take up the challenge and find ways to reduce expenditure and improve efficiency, others will see this too much to bare and dissolve the business. Other forms of increasing productivity include, train and educate workers, increase capital accessibility, and improve the prevailing business environment.

(iii) Labor market efficiency

Low income prevails in a monopolistic market; on the contrary, competitive labor market, worker tends to get high wages as they have bargaining power. In a competitive market like the US, the price is typically determined by the market, even though firms pay workers in time increasing wages may result from them getting out of the market. A way to solve the issue of low salary is for the government to establish a uniforms wage across the labor market. This uniformity will ensure that every firm incur the added cost and it is there competitive nature that will sustain them. However, it is almost impossible to set a uniform wage rate owing to different production sectors, size, and line of business among others. Another way of managing the labor force is to minimize the population of immigrants entering the country, especially for semi-skilled and unskilled individuals.

The US government should come up with unemployment insurance that cushion workers during their long search for that perfect job. This will give people ample time to look for the most appropriate job concerning their specialty. The insurance aims to reduce situations where individuals with engineering skills, for instance, to settle for a fast food store to pay his bills. In the process, there will be the availability of spaces for the most qualified in every sector.

The impediment to achieving the goal.

Although there is a positive impact on the workers especially, the adverse effects of the minimum wage is equally significant. For instance, if not correctly controlled, this can lead to unemployment. Below is a diagram according to (Fern´andez, 2018) for illustration.

An increase in supply as a result of a rise in wages leads to a decrease in demand. Workers flood to the region seeking to work and be paid the higher salary leading to an increase in the population of workers than the firms can employ.











The winners are mainly the workers while the losers are the firms. The impact on revenue can be positive especially if firms respond well to such changes that are by increasing production techniques. Generally, the optimization is a massive step towards achieving a stable economy and reduce the inequality in income among citizens.








Arif, R. N.-A. (2012, December). Article Review on World Bank Report, Optimal Design for a Minimum Wage Policy in Malaysia. MPRA-Munich Personal RePEc Archive.

BLS. (2018). Characteristics of minimum wage workers, 2017.

Fern´andez, J. (2018, February 10). The Economics of Minimum Wage Regulations.

Lavecchia, A. M. (2018, January). Minimum Wage Policy with Optimal Taxes and Unemployment*.