Minimum Wage: Its Pros and Cons (Essay Example)
Wage is when an employee gets compensated for their time and labor in the form of monetary remuneration by an employer. It is given in return for a worker’s service or the amount of work accomplished as a salary. The market forces determine the wage rate. There is an assumption that many firms offer the same job to workers who have the same set of skills making it a perfectly competitive market. The equilibrium for setting the wage is determined by the demand and supply of the amount of labor force available. Employees are the ones who choose the amount of pay offered to make firms the wage takers.
The definition of minimum wage is the least amount of money that employees may receive legally either at an hourly, daily or monthly rate. It is the lowest pay for which employees are allowed to offer their services, and this term gets referred to as the market floor for wage. Earlier, before the enforcement of minimum wage, unscrupulous employers would take advantage of young workers and women by underpaying them for their services. Currently, the law protects workers, and they may receive a set amount as the lowest pay for their labor.
In 1894, New Zealand became the first country globally to enforce the minimum wage law, and since then, more nations have followed in their footsteps. The minimum wage rate varies in various countries, and it is up to the government to set the lowest amount that they allow employers to pay their employees. There are two types of minimum wage, the formal one where this law gets enforced by government and the informal one which is in place without any legal bindings as some workers do not adhere to regulations set (Dube, Nadu, & Reich, 2007). A country like Malaysia applies the minimum wage law to plantation workers on the amount of money that they get each month but does not have a country-wide minimum wage law.
Advantages of Minimum Wage
1. Poverty Reduction
The levels of poverty were reduced with the introduction of the minimum wage. Introducing minimum wage raises the least amount of money that workers should receive for their services which in turn reflects the net amount that they receive, increasing their spending ability. Workers can spend more money on goods and other activities such as leisure once their income levels rise.
2. The Level of Productivity Increases
Once minimum wage is introduced in a company, the level of productivity increases. It supports the efficient wage theory that states that workers get motivated by higher wages and due to this, they work harder which increases their labor productivity. Employees are compelled to perform and work better if they get paid a high salary for fear of losing their job.
It is an additional incentive for an unemployed person to seek and accept work where they know the minimum wage law applies. The minimum wage boosts the participation rate of employees as well as adds to the different benefits that a worker gains from being employed. Since the minimum income is guaranteed, people get encouraged to earn an honest living by joining the workforce.
4. Boosts Spending Ability
The consumption levels of employees increase since they now receive more money which increases their spending capability. The country gains from this since workers spend more on goods and services boosting the economy (Bauer, Kluve, Schaffner, & Schmidt, 2009).
5. Reduces Government Spending
The government costs that go towards social welfare programs decrease since low income earners are now earning more as a result of the minimum wage. Employees will depend less on the government for support and will be able to meet their basic obligations since they enjoy minimum wages. The money that the government saves on social spending, in turn, will be used for investing in other areas that need its assistance.
Demerits of Minimum Wage
Where the market has perfect competition, the minimum wage will contribute to the levels of unemployment. If the minimum wage set does not match the market equilibrium, the supply of workers is more than the demand, causing market destabilization. When minimum wage applies in such a scenario, there is an extra supply of unwanted labor to companies which causes unemployment. When the minimum wage law requires a company to pay workers more than they can, they will reduce the number of workers they hire and raise the prices of their services and commodities leading to joblessness (Lemos, 2007).
2. Price Increases
When there is money in the hands of workers due to increase in their wages, it may cause inflation leading to increasing prices for goods and services. Through the introduction of minimum wage, the money available for spending increases and businesses will, in turn, try to raise the prices of goods. They do this to take advantage since there is more money to spend. Employees will then lose the money they get to inflation because market prices for the same commodities they purchase will rise (Lemos, 2007).
3. The Cost of Investing Rises
A company is forced to pay their employees which increases production cost and the overall cost of investment. Paying workers more reduces the revenue that a company earns plus its investment costs. The company will then raise the price of commodities due to the rising cost of production (Dube, Naidu, & Reich 2007).
Should Minimum Wage Be Implemented?
Minimum wage, in many countries, is for the protection of workers and fighting labor exploitation. After years of practice, severe repercussions of it have come to light. Studies show that the labor market is negatively affected by the minimum wage and it also increases the unemployment levels.
There is a vital influence of minimum wage on young people who do not possess networking connections, proper skills, and experience according to American columnist and researcher Don Watkins. By accepting low payments in the area that they choose to work in, young people get occupied while gaining the necessary experience that they need. It has been said that if a company is forced to pay its interns higher wages, this would only result in preventing young people from getting the internships in the first place. Young people will, in turn, suffer from unemployment thus increasing poverty levels.
Small businesses are also affected by the minimum wage laws. Their costs of operations become higher than their budget. Salaries should be a cost that a small business can control and conform to their capabilities. By denying them this, they are forced to lower the number of employees.
There are merits and demerits of the minimum wage legislation. The majority of critics tend to think that other ways to ensure social protection and income inequality should be deliberated on. Minimum wage, on the other hand, boosts the growth of a country economically by increasing spending capability of workers which results in the increase of consumption of goods and services. All this, however, depends on how the labor market is structured. A moderate increase in salaries will not affect employment, but a radical raise may lead to unemployment. The slow increase in minimum wage ensures the stability of a country’s economy since the taxes and unemployment rate also increase gradually. There will be no inflation, and the percentage of those who are jobless will not be high in the country if the minimum wage gets implemented logically. The welfare of the people, in general, will improve and the economic growth of the nation gets stimulated by balancing the minimum wage levels.