How implementation of Minimum Wage affect the economy market
How implementation of Minimum Wage affect the economy market BY yuxtangol 25 Statutory minimum wage regulation was first introduced in New Zealand in 1894. Some attempt to control wages had been present since policymakers started believe that the market wages of labour was unfair to the workers. Minimum wage laws dictate a lowest hourly or monthly wage rate that employers may legally pay to workers. For instance, the Minionion government had set a new minimum wages rate of MS900 which intend to ensure that the basic needs of the workers and their families are met.
Since that the growing debates over the imposition of minimum age policy have become a very popular topic with examiners in recent year, therefore we may examine the effects of the minimum wage by looking at the theory behind it. Diagraml shows a classical minimum wage set up in a competitive labour market. Like all other markets, competitive labour markets are modelled by the forces of supply and demand.
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In this case, workers determine the supply of labours and firms determine the demand of labour. The Minister of Human Resources, Mr Bananaa Yellow claimed that the new minimum wage (MS900) represented an average increase of 18. % compare to the previous minimum wage (MS757. 7), which affecting some 128,500 low-skilled workers in Minionland. But the diagram above illustrates that there will be a decrease in the quantity of from B to D, which resulting in a surplus of labour from D to C. This should make an intuitive sense that an increase of minimum wage raise the input costs of firm so that they are now less willing and able to hire more workers, while they are more people would like to have a Job because of the higher wage rate.
The exceed supply of labour includes both a reduction in employment (A to C) along with the second component consisting of orkers who are drawn into the labour market by the prospect of earning higher minimum wage (D to B). In this case, raising minimum wages rate seems to be wrong as it only benefit some typical high-skilled workers but comes at the expense of those low-skilled workers (typically low-skilled youth) who are shut out of the labour markets.
However, several studies and researches find that the magnitude of negative effect on employment varies across countries due to differences in labour market characteristics and the prevailing economic environment. For Minionion, while they maybe some risk on lower unemployment, this effect is expected to be ransitory and contained, given the strong economic and labour market fundamentals and proficiency. Improvement of the economic and labour markets conditions are expected to increase the quantity demanded of labour by shifting the demand curve from DO to Dl .
Assuming this strategy is going to push the demand curve upward to the same 128,500 amount of the low-skilled workers, thus it will substantially shrink the effects of the new minimum wage rate on unemployment. In fact, there is a lot of arguments claimed that the traditional view of the minimum wage doesn’t hold true in real life. There is the Krueger and Card study that oncluded that “We find no indication that the rise in the minimum wage reduced employment”. (Robert,2013) Most studies find that the minimum wage policy has only a slight ettect on employment but not result in the mass unemployment predicted in the traditional view.
One of the possible assumptions to explain this phenomenon is that the labour demanded by firms and the demand for the product that workers produce is both highly inelastic due to the rapid economic and population growth. Diagram2 above indicates the elasticity of demand on employment and the elasticity of demand on product. In view of the sky-rocketed growth of economic and opulation, hence the firms need more workers to increase production and also productivity to satisfy the demand and maximise their profit, even though they are forced to increase wages.
Since the demand of product is highly inelastic, the firms can also pass on the increase in wage to consumers in the form of higher prices without lay off any workers. The magnitude of price increase would also be constrained by the adjustments that made by the larger firms which tend to be less affected by the imposition of new minimum wage rate. On the contrary, the Smurfland government does not favour setting a minimum wage. They believe that imposition of minimum wage policy will reduce employment in affected industries and affected groups of low-skilled workers.
Hence, the Smurfland government believe that it is better to focus on the supply sides (workers), rather than emphasis on the wage setting institution. Their interventions focus on enhancing the skills of low- wage workers, thus increasing their productivity through training and development. Rapid development in science and technology boost the demand for high-skilled workers, it resulting in wages premium for more highly educated workers. Therefore, ther things unchanged, the wages rate is believed to be positively related with the education and productivity of the workers.
Thus we can tell from diagram3 below, assume that the supply of labour is inelastic, while the technology advance increase the demand of skilled workers, the demand curve shifts from DO to Dl, putting a pressure on employment upward from QO to QI . And by enhancing skills, more workers meet the prerequisite for higher wages, which results in raising the equilibrium wages rate from WO to WI . Therefore in order to achieve the objectives of reduce poverty and improve living standard of workers, it is important to uarantee those low-skilled workers to undertake productivity-enhancing measures.
Skill enhancement policy is believed that can improved supply-side performance and achieved sustained development of economic. It is important to note that enforcement of this policy won’t accompany with negative effects like inflation and unemployment. It improves both quantity and quality of supply and labour, make the labour market more competitive and flexible so that it is more able for labour force to match the demand. Provided training, especially for those who facing problem of structural unemployment, is expected to improve the occupational mobility of orkers.
Additionally, a well-educated workface also plays an important role as a magnet to attract foreign investment flows into the economy. In order to raise the low-skilled worker’s living standards, the most efficient way is to increase their incomes to levels that fulfil their basic needs. Undeniably, in the long run, the income levels reflect the ability to produce high quality goods and services. Make no mistake that improvement in income levels and living standards cannot be achieved without expansion in outpu t.
Studies ot IJ e n te Nations Human Development Programme found that the ratio of the amount of children of fficial secondary school age enrolled in school, to the amount of children of official secondary school age in the population, is higher in developed nations than it is in developing ones. ( Radcliffe,2012) Hence, invest in education and training for workers is not only benefits in increase their earning potential, but also assist us to transform into high income, high productivity country. Overall, it concludes that both policies could achieve the same goals in different way.
However, when we talk about efficiency, we may find that increase the equilibrium wage rate by raising the skill level of workers is actually challenging in practice. For instance, without intervention of government, we can’t guarantee that the firms will take the right steps to increase productivity, instead of relying on the low-cost workers. Besides, skill enhancement policy require government to spend more budget on investing education, and it also takes longer realisation period to see the results.
Due to the greater opportunity costs and less efficiency, it could be evaluated that skill enhancement policy may not be the first choice to reduce poverty. As contrasted, setting a minimum wage rate is envisaged to have obvious effect in educing poverty since it directly increases low-skilled workers wage rate. Firm may be encouraged to provide training to improve the productivity of workers since the relative cost between capital and labour narrows. These changes would facilitate the transformation of nations into high productivity and high income economy.
We may conclude that set up a minimum wage will probably have slightly negative effect on unemployment. But with this small opportunity costs, it may boots our economy and improve the living standard of most workers. In other words, the benefits of minimum wage far outweigh the negatives. There should be a simple rule in life that if you are willing to work hard, you should be able to feed yourself. Minimum wage policy is envisaged to be a positive step towards encouraging a fairer wage structure.
And other productivity-enhancing measures such as provision of training to up-skilled workers will further complement the minimum wage policy to hit its target. I believe that minimum wage policy is well-positioned to achieve its goal, with government support, as well as proper supervision and enforcement. Reterences Oganisian, A. 2013. Economics 101 : Taxes, Minimum Wages, and Why You Shouldn’t Boycott Sweatshops – TheCollegeConservative. [online] Available at:
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