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When minimum wage is higher then the equilibrium wage

PART A

Using demand and supply sides, examine the arguments in favour and against the minimum wage in UK.

Minimum wage

The national minimum wage rate is a minimum hourly rate for any kind of labour legally paid to worker by the employer. It was introduced after the election of the labour government in 1997 and came into force in 1999, Adult was paid hourly rate of £3.60 and a rate for those aged 18-21 was £3.00. From October 2010 minimum wage rates increased to £5.93 from £5.80 for adults and £4.92 from 4.83 for those who are under 18.

Supply of labour

The supply of labour refers to the total number of hours that labour is willing and able to supply at a given wage rate. Supply of labour increases with a higher wage rate offered to employees in the market and vice versa. From the below mentioned diagram supply curve shows that, if you keep increasing the hourly wages employee will be encouraged to work more but at certain level falls down because the employee can earn the same income by working less hours.

http://www.analystnotes.com/graph/econo/SS05SAsubb3.gif

Source: http://www.analystnotes.com/notes/los_detail.php?id=1119

The supply curve of labour is upward sloping showing that at higher wages, more employees are encouraged to work. At higher wage rate employee can work few hours and earn more. If the wages rises from W1 to W2 then the employee is encouraged to work more because of higher wages the employee will rise their hours worked to L2. When the wages rises from W2 to W3 the number of hours worked would fall from L2 to L3. Because at certain time when wages raises people feel better and therefore may not feel need to work as many hours. As the wages rise, the chance of cost of luxury rises

Demand of labour

There is opposite link between the demand of labour and the wage rate that an industry needs to pay each employee. If the wage rate increases it is more expensive to take up more employees. When wages are lower labour becomes cheaper as less number of employees are ready to work at a given wage rate. When wage increases industry demand less labour as firm is generally believed to be react negatively connected to the real wage.

http://tutor2u.net/economics/content/diagrams/wage_t3.gif

Source: http://tutor2u.net/economics/content/topics/labourmarket/labour_demand.htm

In the left figure when there a fall in the wage rate from W1 to W2, the industry will increase labour from E1 to E2 because the labour has become cheaper for a given level of productivity compared to their inputs. Rise in the wage rate from W1 to W3 cause reduction of labour demanded.

Marginal revenue productivity means the change in the total returns from the firm as a result of selling the amount produced by an extra employee. Marginal revenue productivity of labour will increase when there is an increase in labour productivity and the demand for the industry’s output which causes higher prices and increases the value of finished goods produced by the employee. For a given wage rate, W1 a profit maximising firm will employ more employees.

When minimum wage is higher than the equilibrium wage

The minimum wage is a price floor

Source: http://tutor2u.net/economics/revision-notes/as-marketfailure-minimum-prices.html

Labour supply and demand curve are shown in the above diagram. The equilibrium wage is W1 where demand and supply are equal. Minimum wage rate is at Wmin there will be an overload of labour equal to E3-E2 as the supply of labour will increase more employees are ready to work at the high wage than prior. And the decrease in the demand of labour as the wage rate increases ultimately results into unemployment.

Arguments in favour of minimum wage

Standard of living raises and the poverty is eradicated as the low paid employees can earn more and the more employees are encouraged to work to get higher wages.

Distribution of earnings between high paid and low pay may be lessened.

Every employee will be paid fairly and equally.

More people are encouraged to work rather than indulging in illegal activities like smuggling of drugs, weapons and indulging in criminal activities.

Men and women will be paid equally reducing differentials which ultimately reduces poverty and increases the standard of living,

It helps the government to generate more revenue through taxation which government ultimately uses for the well being of public like constructing roads, by providing better education facilities, building public libraries, and invest in many more things which are useful and open for general public.

Equal pay for equal work.

Minimum wage will encourage quality workforce from overseas.

Arguments in against of minimum wage

It is unfair for average employee and the employee who works above the average.

It encourages lesser demand for labour as it is cost for employer

It excludes certain range of labour.

High wage rate causes price inflation in the economy.

It discourages further education among young people as they are tempted to work and earn.

Conclusion

Some believes that national minimum wage carry out the purpose so called decent wages, to eliminate exploitation, to reduce poverty, and to ensure equal pay for equal work above mentioned objective does not help to economy’s prosperity. Continuous development of the economy will help to recover the benefit of wage earners as the increase prosperity will make possible increase in wages. A minimum wage cannot ensure the economic expansion.

According to me current minimum wage wage rate that is £5.93 is not enough to survive in this world because if we take example of part time worker he or she works 80 hours a month and earns about £480 and full time worker who works 160 hours a month and earns about £950 a month is not enough as we have to pay rent, education fees, entertainment, and many such miscellaneous expenses. From this little income it is not possible to pay all the bills and a person can save for the future. For example if we are located in zone 5 or zone 6 we have to pay £300 to £350 rent a month plus there are other expenses a person cannot survive with this little income every month as nowadays taxes, and prices of all the commodities are going up so to catch up with the economy and to survive there should be at least £7 a hour.

PART-B

Using appropriate examples/scenarios give your assessment of the following two possible ways of forecasting.

Trend extrapolation

Consensus methods

Forecasting helps the business to predict the future of the market condition. There are various methods to of Forecasting such as Genius forecasting, Trend extrapolation, Consensus methods, Simulation methods, Cross impact matrix method, Decision trees etc. here we will look into two forecasting methods, trend extrapolation and consensus methods.

Trend extrapolation

Trend extrapolation means forecasting technique which helps to predict the future behaviour pattern of the time series data. This method helps to take decision making and planning for the future comparing the last week, month and year data although the data predicted cannot forecast completely but to the extend we can rely on it. This method study cycles in historical data and uses mathematical data to extrapolate to the future. Its main purpose is to identify the trends and cycles in the data so that suitable model can be chosen.

Some common types of trends are often shown graphically as line graphs with the level of a dependant variable on the y-axis and the time period on x-axis. There are three general methods to use algebraic techniques for trend line extrapolation. The first step is to calculate a future period. The second technique is to make use of specialized functions within a spreadsheet program or another data analysis program. The third technique is to use a spreadsheet or data analysis program to construct a graph within a trend line and to automatically extend trend line to future periods.

Trend extrapolation example

Following is the historical sales data of the Crazy kids since it’s established.

YEAR

SALES

1999

£49000

2000

£78000

2001

£119100

2002

£119900

2003

£137200

2004

139100

2005

149500

2006

152700

2007

155200

2008

162300

2009

168800

Here we have to forecast the sales for the year 2010 by suing regression method.Using the regression method I have projected the sales for the year 2010.

YEARS

T

SALES Yt

T*Yt

T2

1999

1

£49000

£49000

1

2000

2

£78000

£156000

4

2001

3

£119100

£357300

9

2002

4

£119900

£479600

16

2003

5

£137200

£686000

25

2004

6

£139100

£834600

36

2005

7

£149500

£1046500

49

2006

8

£152700

£1221600

64

2007

9

£155200

£1396800

81

2008

10

£162300

£1623000

100

2009

11

£168800

£1856800

121

66

£1430800

£9707200

506

2010

£242313

Forecasting sales using regression technique

- -

t =66/11=6 y = 1430800/11 =130072.72

x= 12 (projection of sales for 12th year)

b1= n∑tYt -∑t∑Yt

________________

n∑t2 –(∑t)2

=(11) (9707200) – (66) 1430800)

___________________________

(11) (506) – (66)2

B1 = 106779200 -94432800

______________________

5566 – 4356

=12346400

___________

1210

B1 =10203.636

_ _

b0 = y – bt =130072.72 -10203.636

= 119869.09

T 12 = 119869.09 + (10203.636) (12)

= 119869.09 + 122443.63

= 242312.72

= 242313

This was represented on the scattered graph as follows:

Source: prepared by self in Microsoft excel.

Following is the historical cost data of Crazy kids for the past 3 years:

Years Total Cost Units produced and sold

2007 £130604 28640

2008 £123097 27323

2009 £132456 30680

Using the high and low method we calculated the fixed cost and the variable cost as follows:

HLM formula Y = a+bx, where:

Y = Total cost

X = any given measure of activity

a = the estimated total fixed cost component

b = the estimated variable cost rate per unit of x

Year’s units produced corresponding cost

Highest Volume 2008 27323 £123097

Lowest Volume 2009 30680 £132456

Therefore the variable cost per unit is calculated as follows:

Variable cost per unit = (132456 – 123097) / (30680 -27323)

Therefore variable cost (b) = 2 per unit

Fixed cost can be calculated using the HLM formula using amounts for the year 2009 as follows;

Y = a+bx

132456 =a + 30680*2

Therefore fixed cost (a) = 132456 -61360 = 71096

Conclusion:

Making recommendations based on the available forecasts demands an understanding of the steps involved in the forecasting process itself. Without this it’s not possible for a manager to assess the risk associated with the decisions. Obviously, if the forecasts are concerned with low risk markets and are based on good quality data, decisions will be easier to take. It would however require a strong manger to act upon long range forecasts within a volatile market.

Recommendations can only be realistically made if the suitability of the market conditions matches the reliability of the forecast and its time span.

B). Consensus methods

Consensus method is a form of decision making process used for forecasting. This method is concerned primarily with that process. In this method there is group decision making process not only favour but consent is given to minor and and proper resolution is taken on decision approved. Consensus decision making is also a substitute to top down decision making practices in hierarchical groups.

The outcome of this method include better decisions through the input of all stakeholders, better decision is taken as the process includes all major stakeholders and generate as much agreement as possible for greater cooperation in implementing the resulting decisions. The Delphi method is based on the assumption that group decisions are more valid than individual judgments. This method is straightforward approach in doing research in the area of forecasting and for building consensus. This technique can be adapted for use in face to face meetings. This method of forecasting is designed to predict the likelihood of future events.

This is one of the simplest methods of forecast used by panel of experts. This method is used to forecast day to day activities like predicting whether, sales for particular commodity etc.

The drawback of this forecast is committee uses questionnaire instead of discussing issues in real life the questionnaire is prepared with the help of future data gathered by the group of experts on only which we cannot rely of taking any important decision as the different people have different opinion.

Conclusion

Trend extrapolation and Consensus methods have different forms of forecasting with their own advantages and disadvantages based on the historical data stored by different bodies. It does not give accurate result but to the large extend helps to predict the future for the market to take necessary decisions based on the forecasting.

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