Effects Of Minimum Wage

Introduction

The minimum wage is the lowest amount of compensation an employee must receive for performing labour. It is a price floor below which the market price may not fall and to be effective has to be set above the equilibrium price. Minimum wages are established by contracts or legislation by government. It is therefore illegal to pay an employee less than the minimum wage. The supporters of minimum wage say it increases the standard of living, reduce poverty, reduce inequality and boost morale while the opponents say the exact opposite. The question to pose is then: what exactly does minimum wage do?

This essay look at the effect of minimum wage on income inequality, international experience of minimum wage, effects of minimum wage

Minimum wage addresses poverty associated with low wages; it addresses poverty by increasing the income of the low paid workers. The goal of the minimum wage legislation is to redistribute earnings to low paid workers and thus lift the working poor out of poverty (Freeman, 1996). Since people who are considered to be living under poverty are those who live with less than $2, minimum wage will enable them to live on more than $2 a day. On a contrary minimum wage also takes away the little income that some employees were getting before minimum wage due to job losses therefore minimum wage is beneficiary to some of the lower paid workers while it subjects others in a terrible condition of unemployment and poverty.

Advantages and disadvantages of minimum wage

Advantages of minimum wage

Better standard of living

The minimum wage ultimately reduces poverty nationally and provides a reliable and stable source of income for many, and without it, the social consequences would be far greater than if it were not to exist. According to Katzne (1961), the purpose of minimum wage is to raise the standard of living of the poorest citizens in a society. Minimum wage is to accomplish this objective by directly increasing the purchasing power of the lowest paid

This cost will then be absorbed by firms or more likely be passed on to consumers in the form of higher prices. This is an example of cost-push inflation. Such inflation erodes income gains associated with minimum wages, while causing aggregate demand levels in the economy to decline (DPRU, 2008).

Shadow labour markets may develop

Since minimum price is set above market clearing prices, shadow markets are likely to develop. This is because at the minimum price there is a surplus of labour. Since more people are willing to work at the minimum price than employers are willing to hire, it is likely that workers will try to sell their services at illegally low prices. These workers are often illegal immigrants who are hired in favour of tax paying citizens. This will cause a decrease in tax revenue as more workers are not reporting their incomes, and an increase in the amount of unemployment benefits the government will have to pay out. The minimum wage benefits those who are employed at it and disadvantages those who lose out on potential employment because of employers hiring from a shadow labour market. The effect of minimum wages on unemployment will depend on the elasticity of demand for labour. If the demand for labour is inelastic, the introduction of minimum wages will