Business Cycle in Economy

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Appearing in last Sunday’s edition of New York Times, the article “Living on Minimum Wage” illustrates a picture of an American economy which is in the recovery phase in the business cycle. This paper illuminates some of the main ideas contained in the article.

Business cycle, also referred to as economic cycle, is a term mainly used by economics scholars and business practitioners to demonstrate the fluctuating movements (increasing or decreasing) of levels of the gross domestic product (GDP) in an economy over a particular period of time that may vary from several months to a number of years (Ball, 2009).

The recurring and fluctuating levels of the GDP an economy experiences over a certain time frame are grouped into five phases for ease of analysis – growth (economic expansion), peak, recession (economic contraction), trough and recovery (McConnell, 2009; Romer, 1999).

From the article, it is clear that the United States economy suffered under the 2008 financial crisis and many economic pundits viewed the crisis as a major triggering force for the economic contraction that was witnessed in many economies of the developed world.

The author of the article acknowledges that “the recession took middle-class jobs, and the recovery has replaced them with low-income ones, a trend that has exacerbated income inequality” (Lowrey, 2013 para. 2). The shift from middle-class jobs to low-income jobs, according to Romer (1999) is a viable indicator of the economic fluctuations in the business cycle over time.

Another major theme in the article is President Obama’s concept of stimulating the federal minimum wage in his economic proposal by increasing the minimum wage from $7.25 an hour (current) to at least $9 to lift numerous American families above the poverty line (Lowrey, 2013).

As demonstrated in the relevant economics literature, the recovery phase in the business cycle is typified by improvement in customer’s optimism of the market, low bank lending rates, growth of companies due to capacity to finance projects, enhanced productivity due to better aggregate demand of the economy, increased production that allows organizations to start recruiting new workers, and increased income of consumers who can now manage to buy capital goods (Ball, 2009; McConnell, 2009; Romer, 1999).

Although the other variables have not been addressed in the article, the proposed increase in the minimum wage by President Obama demonstrates an economy that is in its recovery phase after the financial crisis.

As illustrated in the article, there has been opposing views about President Obama’s proposal to raise minimum wages, with some conformists and economics experts saying that raising the costs of recruiting new workers results in few workers whereas other pundits suggest that minimum wage increment does not necessarily result in companies shedding workers because it helps minimize turnover (Lowrey, 2013).

These are valid arguments that business people need to be aware of as they make critical organizational decisions since they reflect the uncertainties of the recovery phase. However, according to available literature, the profit margins of American companies will begin to rise, and the GDP will also start to expand during the recovery phase (McConnell, 2009), hence the need to reciprocate by raising the minimum wages of workers in the lowest echelons of the economy.

Ultimately, therefore, President Obama’s proposal to raise the minimum wages as demonstrated in the article may be somewhat rushed because the American economy was in bad shape and the uncertainties of the future are still hanging on the minds of business practitioners as they re-engineer their companies to start making profits. However, it is the right thing to do because the United States economy is slowly recovering from the effects of the recent global recession.

References

Ball, L. M. (2009). Money, Banking, and Financial Markets. New York: Worth Publishers.

Lowrey, A. (2013). Living on minimum wage.New York Times.

McConnell, C. R. (2009). Economics: Principles, Problems, and Policies. Boston: McGraw-Hill Irwin.

Romer, C.D. (1999). Changes in business cycles: Evidence and explanations. Journal of Economic Perspectives, 13(2), 23-44. Web.

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Business Cycle in Economy

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