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Minimum Wage: Costs and Benefits

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INTRODUCTION AND DEFINITION OF MINIMUM WAGE

The concept of minimum wage has been an age long economic debate that has broadened economists’ horizon into examining both its costs and benefits. The whole concept behind minimum wage basically deals with how the welfare of workers in a country, state or geographical region can best be improved upon. Since the premiere of the industrial revolution which dates back to the early 19th century in England, minimum wage has become an increasingly open and popular debate. However, this definition has faced stiff opposition from activist who clamor for a minimum wage bracket. From a broader perspective, some critics of the minimum wage concept has proposed that instead of increasing the wages that workers receive, the employers should be more concerned about improving their welfare. This has been narrowed down to include their place of abode, their feeding, health insurance and other benefits that are not included as part of employees’ income. The proponents of employees’ welfare have a strong belief that it would help the workers as it basically deals with economic development and in addition to this, would prevent the occurrence of wage inflation.

However, there is a definition of minimum wage which is universally acceptable. According to the Wikipedia encyclopedia, it is simply defined as the least number in hours in terms of payment that an employer may legally pay to employees’. In examining this definition, it simply tells us that it is based on a set of rules guiding employees’ compensation for services rendered.

COST OF MINIMUM WAGE: ALGEBRAIC AND GRAPHICAL REPRESENTATION

ALGEBRAIC REPRESENTATION

The cost of minimum wage can be represented algebraically via the national income model. Hence, the cost is based on a macro-economic analysis given as: GDP= C+I+G+X-M. Where they are stated as follows;

GDP= Gross domestic product, C= Consumption, I= Investment, G= Government expenditure, X= Export, M= Import. In analyzing each of the following components, the following are observations based solely on the cost of minimum wage.

  • CONSUMPTION: With regards to the consumption of goods and services, opponents to an increase in minimum wage believes that it would lead to a drastic reduction in the consumption of manufactured goods as well as services as the cost of production is transferred to the consumers. This would lead to an increase in supply and a reduction in demand owing to cost.
  • INVESTMENT: Conservatives are of the opinion that an increase in minimum wage would lead to a slowdown in investment. Employers would be unwilling to expand their business because of the heavy cost that would be paid to labor. This is because an increase in minimum wage would drive up the cost of labor which is very essential to production. Hence businesses would be reluctant to expand thereby leading to a reduction in investment in the long-run.
  • GOVERNMENT EXPENDITURE: Conservatives are of the belief that an increase in minimum wage would drive up government expenditure. To buttress their point, it should be noted that an increase in minimum wage would drive up the cost of production which would lead to job cuts. Job cuts would prompt the government to act quickly by providing social security programs that would discourage people from engaging in social vices and illegal activities. This increases the government expenditure.
  • EXPORTS: An increase in the minimum wage would result in a drastic reduction in exports of the subject nation. This occurs as a result of the fact that when there is an increase in the minimum wage, it leads to an increase in the cost of production and eventually an increase in the prices of goods to be exported. This would eventually lead to a reduction in the units of exported goods.
  • IMPORTS: Increasing the minimum wage would lead to a sharp increase in the importation of goods. The foreign nation would want to make its own good cheaper in the subject nation where the increase has occurred. This may eventually lead to illegal trading activities such as dumping of goods or manufacturing of substandard goods. Hence foreign products would flock the domestic markets killing the domestic industry which would eventually lead to unemployment and a reduction in government revenue.

GRAPHICAL REPRESENTATION

y axis

QSo

$11.00QS1

QSo

$7.25x axis

(Minimum wage) 13.2units 20 units

Units of goods produced

The graph above represents the effect of an increase in minimum wage on the cost of production. From the above graph, the y axis represents an increase in the minimum wage of workers from $7.25 to $11.00. This led to the following observations.

  • At initial minimum wage of $7.25, the number of units produced was 20units, hence cost of production is $7.25 * 20 = $145.working by assumption
  • At new minimum wage of $11.00, producers are trying to maximize output by reducing input. Hence new cost of production is $11.00 * 13.2 = $145.2 which is equivalent to $145. Hence the old cost of production is equal to the new cost of production (Ceteris paribus)

As a result of this action initial quantity supplied by producers (QSo) is reduced from 20units to approximately 13units. This is represented by a left word movement of the arrow from QSo to QS1, which signifies a reduction. In addition to this, the x-axis is also represented by a left word movement of the arrow from initial units produced (20units) to new units produced (13.2units equivalent to 13units)

BENEFITS OF MINIMUM WAGE: MATHEMATICALAND GRAPHICAL REPRESENTATION

MATHEMATICAL REPRESENTATION

For a better representation of the benefits of minimum wage, the most appropriate model to be employed would be the national income model. This model was also used in the cost of minimum wage. It is stated as:

GDP = C + I + G + X – M

C- CONSUMPTION

Proponents of minimum wage increase are of strong opinion that it increases the level of consumption among the citizens. This is based on one of the factors affecting demand which states that quantity demanded increase with respect to an increase in the income of individuals. In other words when the minimum wage is increased people would be able to purchase more goods and services compared to the original amount.

I – INVESTMENT

Since the proponents of an increase in the minimum wage believes it would eliminate low paying jobs and lead to higher paying jobs, hence as it pertains to investment, an increase in the minimum wage would lead to greater investment in high skilled industries which would be beneficial to gross domestic product. This type of investments would in most cases be long term and is very crucial in moving a country from developing to developed.

G- GOVERNMENT EXPENDITURE

Increasing the minimum wage would reduce the expenditure from government. This is according to proponents who believe that workers would earn more as a result of the increase and thereby depend less on the government for welfare benefits. This would eventually reduce expenditure on the part of the government and lead to more revenue on the part of the citizens. This would be very helpful to the economy as it would create a balanced budget.

X- EXPORT

Exports would be of great benefit to an increase minimum wage. The reason for this is that it would be very helpful in producing goods that meet international standards and can yield maximum utility. This would make the domestic country’s goods competitive in the international market thereby leading to a trade surplus in the long run. The basic reason for this is that with an increased minimum wage, employers demand more from employees. Hence their skills and competences are put to test.

M- IMPORT

As regards import, an increase in the minimum wage would not be helpful to imputed goods. This is based on assumption of the proponents of minimum wage increase. It is strongly believed that because the imported goods are cheap, they would most likely be substandard compared to those goods produced in the home country. Hence consumers would boycott these products and promote their domestic product instead. This would eventually increase the gross domestic product (GDP)

In summary, an increase in minimum wage (Ceteris paribus) would be favorable to the economy given the following factors are synergized.

GRAPHICAL REPRESENTATION: BENEFITS OF MINIMUM WAGE

Y axis

QD1

$11.00

QDo

QD1

$7.25QDo

X axis

(Minimum wage) 1kg 3kg

Apples in kg

The diagram above represents the effect of an increase in minimum wage on consumption. A simplified analysis of the graph is stated thus:

  • In the above diagram, the vertical axis represents minimum wage. It also shows how the minimum wage has increased from its initial amount of $7.25to $11.00
  • The horizontal axis shows the amount in kg of apples that consumers can purchase given their income.
  • Ceteris paribus, at $7.25 minimum wage, consumers are able to purchase 1kg of apples. When the minimum wage is increased to $11.00, there is a great increase by 2kg bringing the new consumption of apples to 3kg. This signifies that an increase in minimum wage has a positive effect on consumption.

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