For long, the minimum wage controversy has been a topic of debate to whether it produces positive or negative effects on society. To begin with, the need for a country to have a minimum wage law was stressed by the international labour organization in 1928. Twenty years later, Australia and New Zealand passed the act and we have been using the term “minimum wage law” ever since. At this point more than 90% of all countries have some kind of minimum wage legislation.
Supporters of the minimum wage say that it increases the standard of living of workers, reduces poverty, and forces businesses to be more efficient. Opponents say that if it is high enough to be effective, it increases unemployment, particularly among workers with very low productivity due to inexperience or handicap, thereby harming less skilled workers and possibly excluding some groups from the labor market; additionally it is less effective and more damaging to businesses than other methods of reducing poverty.
Although the goals of the minimum wage are to protect the standards of living, there is great disagreement as to whether the minimum wage is effective in attaining its goals. From the time of their introduction, minimum wage laws have been highly controversial and there are many consequences that have to be accounted for once a minimum wage law has been set. In this paper I will be presenting the controversy that exists in setting a minimum wage law on society.
The case against minimum wage laws states the minimum wage law causes unemployment, increases inflation and is unfair. The economics behind the case is rather simple. By placing a minimum wage higher than the equilibrium wage (the rate that would naturally be set by market forces), the supply of labor increases (more workers want the higher pay) while the demand for labor decreases (fewer employers can pay the higher rate, and so they offer less jobs). As a result total employment is effectively reduced. Figure 1 shows this more clearly:
Additionally higher labor costs might force some firms to shut down resulting in unemployment for poor, low wageworkers that minimum wage was supposed to help. The minimum wage law was “Poorly targeted” to reduce household poverty however much of the benefit of the minimum wage accrues to workers, including teenagers, who do not live in poverty households in the first place. The minimum wage ends up hurting rather than aiding the poor. Another argument set against minimum wage is that it creates inflation.
It has also been a question of debate to where a higher minimum wage causes inflation, or is inflation related to other factors. Economists call this phenomenon the cost- push inflation where an increase in the minimum wage causes an increase in the production costs which subsequently results in inflated prices for consumers. Thirdly, a minimum wage is often said to be unfair since it favors those who already have jobs and those who are belong to unions and locks out those who are entering the labor force, namely the young and the unskilled.
On the other hand, there might be some advantages to setting a minimum wage, like any other policy has its advantages and disadvantages. The minimum wage may increase labor productivity. Workers are paid higher with a higher wage rate, so they are more motivated to work harder and more effectively. And it may reduce labor turnover, the rate at which workers voluntarily quit. Thirdly, firms with monopsony power (power in employing workers) can afford to pay higher wages without creating unemployment. Figure 2 shows this more clearly:
At W1 the market is cleared since supply is equal to demand. For a firm to maximize it profits however, marginal cost has to be equal to marginal revenue, which happens at W2. Therefore increasing the wage to W3 will remain at the same amount of labor Q2 keeping unemployment unchanged. But the real question to be presented, do all firms enjoy monopsony power? Power that enables them to pay higher wages with the same number of employers? I do believe that minimum wage should be abolished and consider minimum wage legislation as another way for government to destroy personal choice.
Minimum wage only applies to people that are employed but does not protect the people that are looking for a job. More than that, minimum wage restriction decreases the chances for unskilled worker to get a job. I absolutely agree that there should be set of government regulation to the labor market to protect interests of both parties (employers and employees). By setting a rate that provides workers with a sustainable wage, while minimizing the impact on unemployment, requires a delicate balancing act.
Key indicators used in establishing the rate include historical wage rates within the country, relevant standards of living, GDP, inflation expectations, the supply and demand for labor, labor costs and other operating costs.
* U. S. Department of Labor, Bureau of Labor Statistics (BLS) * Black, John (2003-09-18). Oxford Dictionary of Economics. Oxford University Press, USA. p. 300. * “Minimum wage encyclopedia topics | Reference. com”. * “ILO 2006: Minimum wages policy (PDF)”. Ilo. org. * Sowell, Thomas (2007-04-02). Basic Economics (3rd Edition): A Common Sense Guide to the Economy. New York: Basic Books.