A minimum wage rate is the lowest price at which labor can be bought and sold in the labor market. It is usually set by the government to protect the suppliers of labor. For a minimum wage rate to be effective, it must be more than the market clearing price at which labor is being supplied and the supply of labor has to match with the demand of labor (Ackerman 23).
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Labor is a resource which is highly demanded and therefore its demand is inelastic. The impact of the minimum wage rate will therefore depend upon the substitutability of capital for labor. If capital is easily substituted for labor then the minimum wage rate will have a small impact and vice versa.
The impact will also depend on whether the wage rate is greater or lesser than the market clearing price and whether the economy will be booming or in recession. Most minimum wage policies are usually local or national but there can also be an international minimum wage where countries want to exploit the third world cheap labor
The paper will examine several theories on minimum wage such as the history of minimum wage and how it came about or how and why it was formed. It will also look into detail the minimum wage law, what it proposes or what it says should be done, look at the minimum wage that is informal and why it is informal. The paper will also look into detail and explain the considerations that are taken when fixing an initial minimum wage.
The paper will also determine the reasons why the minimum wage is important to a nation and the reasons why minimum wage rate should not be constituted in a country. The paper will then conclude by giving a general view on minimum wage and giving a position on whether minimum wage is good or bad
Theory of minimum wage
The first minimum wage was first proposed to prevent the exploitation of those who were working in the manufacturing industry. The industry had women and young workers as its major employees and it was paying those wages which were below standard (Ackerman 30).
The employees were thought to have an unfair bargaining power over their employees and therefore a minimum wage was proposed to protect the employees and make the employers pay fair wages. The focus of the minimum wage rate then changed from making employers par fair wages to making families to become self sufficient. Minimum wage has a social appeal because it ensures that markets provide equality in income.
The goals of the minimum wage are widely accepted as proper because it protects many people. There is however a great concern of whether the minimum wage is effective in achieving its goals. The minimum wage rate varies among different countries. This is because of the differences in the jurisdictions of these countries (Ackerman 21).
The minimum wage varies on bases of setting particular wage amounts and also on the basis of the payment periods. For example US Federal Law requires the minimum wage to be eight dollars in the state of Washington and in United Kingdom it is six Euros per hour (Low Pay Commission 32). Sometimes a minimum wage can exist without a law. This is called the informal minimum wage.
An informal minimum wage usually comes about when there is pressure from labor unions and other unions fighting for the right of workers (Low Pay Commission 41). These pressures usually lead to a minimum wage rate set without a lot of legal processes.
When determining the minimum wage rate, certain considerations must be put in place. One of the considerations is that the loss of jobs should be minimized by the minimum wage and at the same time international competitiveness of labor should be maintained.
Other considerations that should be put in place are the economic conditions, the demand and supply of labor, the levels of wages, the costs of labor, and operation costs of the business and the standards of living of people (Sowell 67). Political and business factors should also be considered. The market for labor is a very important consideration when it comes to minimum wages.
The labor market like any other market is usually affected by forces of supply and demand. The workers are the determinants of supply in the labor market and the firms are the determinants of demand. This always leads to a conflict when it comes to the wage rate. Governments therefore have to intervene and come up with a wage rate that favors both sides
Debate over consequences of minimum wage
There have been several debates on whether minimum wage is good or bad. Many researchers have done studies to either prove the goodness and the badness of minimum wage rate. There have been several arguments for and against the minimum wage.
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Generally, the arguments for minimum wage rate have been so consistent over the years while the arguments against have been that they accomplish what they set to do but they create more problems in the process
Arguments for minimum wage rate
Minimum wage will lead to improved national productivity because it will attract a large amount of labor supply. The labor rate will be attractive and more workers will be attracted to offer their services and hence lead to an improved national productivity (Furlong 2). Another advantage is that it will lead to reduction of poverty and raise the standards of living of people.
This is because they will have a better purchasing power due to reasonable wages (Furlong 2). Minimum wage rate will also lead to decrease in occupational and income inequalities. It encourages greater equality of consumption opportunities because of the higher pay rates
Arguments against minimum wage
High wage rates usually lead to misallocation of resources and failure of markets. Many people will be motivated to supply labor but few will be demanded by the firms because they will want to minimize costs (Waltman 56). This will lead to markets that are less flexible and not competitive.
It will also lead to higher unemployment rates because firms will want to remain with few workers who they will be able to pay at the minimum wage rate. It will also lead to inflation because companies will raise their prices to try and compensate for the high wages that they are paying
Even though a lot of concerns have been raised on the effectiveness and impact of minimum wage, it has still proved to be desired by most countries. This is because without the supply of labor, there will not be any production activities going on in the country.
The supply of labor therefore has to be enticed with higher wage rates. The rates of unemployment however has been a barrier to the minimum wage rate because people who are desperate for jobs will work at any wage rate that the firm is offering and hence limiting the effect of the minimum wage rate. I still think that minimum wage should be imposed on any labor market
Ackerman, Frank. The political economy of inequality. California: Island Press. 2000. Print
Furlong, Frederick. Minimum wage rate. San Francisco: Federal Reserve Bank Research Department. 1988. Print
Low Pay Commission. National Minimum Wage: Low Pay Commission Report 2006. New York: The Stationery office. 2006. Web
Sowell, Thomas. Basic Economics: A Common Sense Guide to the Economy. Boston: Basic Books. 2010. Print
Waltman, Jerold. The politics of the minimum wage. Illinois: University of Illinois Press. 2000. Print