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How Does Minimum Wage Reduce Income Inequality

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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. 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?
In this essay, I look at the effect of minimum wage on income inequality, international experience of minimum wage, effects of minimum wage on employment and poverty and pros and cons of minimum wage then I conclude.
Effect of Minimum wage on income inequality
According to the ruling party (ANC), the minimum wage would be one of the key mechanisms to reduce income inequality. Minimum wage can serve as a mechanism to reduce income inequality because it is devoted to the lowest paid workers and most of these lowest paid workers work for private individuals who tend to pay their workers lower compensation. …show more content…

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).
Effect on relative poverty Minimum wage has a limited effect in reducing poverty as those in the poorest sections of society, who tend to be those receiving Jobseeker’s Allowance and incapacity benefits, do not benefit from it.
Shadow labour markets may

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