The advantages and disadvantages of minimum wage

801 words (3 pages) Essay in Economics

5/12/16 Economics Reference this

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Minimum wage is defined as the lowest wage that is allowed by state and federal labor laws. This wage applies mainly to the semi-skilled and unskilled workers in manufacturing plants and service industries. Or generally, a minimum wage is that artificial wage that the government imposes on the market to make sure that workers are paid. It is imposed by the government mainly to protect the workers from exploitation. This is legislation has both merits and demerits.

Wage, which is one of the factors of production, is determined via interaction of market forces of supply and demand. Where minimum wage is increased within existing levels of production, demand for both services and goods goes up since in such a scenario, aggregate demand is increased (, 2006). Such circumstances encourage investors to venture more into the tertiary industries such as transport, hospitality, Information Technology and education. This will lead to increased foreign direct investment and this has the effect of boosting expansion and growth of a country’s economy. Most firms have increased incentives for investment and to increase their labor productivity since their labor is costly than when there is no minimum wage.

Minimum wage reduces poverty. Wages of lowly paid workers are increased through imposition of minimum wages. An increased income for these laborers means that their poverty level may be reduced and thus lead a better life than before. Legislation of minimum wages is a concept that has caused the productivity of national industries to increase. There is a the efficient wage theory which asserts that the moment there are higher wages in a state, people are motivated even more to work harder and this automatically leads to increased productivity.

People have the tendency to favor jobs that offer better wages. The fall of 2008 saw the greatest economy (United States) experience the biggest economic crisis. One of the major effects of this crisis was the laying-off of workers by most firms in most parts of the globe. This is a situation that increased the number of unemployed people. If minimum wage is increased, there are increased incentives for these people who are unemployed and they want jobs in other industries to accept such jobs. Where there is such a case, the difference between income and benefits from employment gets bigger. Thus having this legislation in place means there may be an increase in the rate of participation as the benefits of working have been increased.

Employment markets have Monopsony employers. Minimum wages are important in a market on employee’s perspective since they counterbalance the effect brought by monopsony employers. Where given forms have monopsony powers, they have the disadvantage of driving the wages down via employment of less workers. However, where there is minimum wages, this becomes difficult. This is a positive effect on employment that is brought by minimum wages.

This concept however has several disadvantages. For example, its implementation causes the enormous increase of labor costs and this is a big burden for our industries. A good example of this is what happened in United States in the year 2000. The moment the administration of Bill Clinton increased the U.S. minimum wage from $5.15 to $6.50, the employers in the state of Washington saw labor costs increase to a staggering value of $204 million per annum (, 2009). This is a situation that forced employers in most states to substitute their labor with capital. More firms started depending on casuals (short-term) thus laying-off most permanently employed workers since they had become expensive to maintain. Unemployment could also come in where minimum wage in implemented and the respective labor market is competitive.

Certain government implementations are done without serious consideration on what will be the effects to the consuming public. Implementation of minimum wages may come with cost push inflation. This is experienced because firms have increased costs and these are mostly passed on to the consumers. This is something that is even more likely where wage differentials have been maintained. Black markets are not healthy for any economy. The moment minimum wages are increased; people who are laid-off as a consequence may turn to the black market for their survival if this is their only option.

Minimum wages rarely increase the income of lowest paid workers. This is so because the lowest income group workers or those poorest in a population normally rely on benefits in the employment and thus the minimum wage implementation may not affect them. Most of those people benefiting via minimum wage implementation are only the second income earners. Thus such households are rarely going to find themselves below federal poverty line. This translates that households with single income earners above federal minimum wage most likely are relatively poorer.

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