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Minimum wage is said to be the lowest compensation for labour offered by a worker. It may be on hourly, daily or monthly basis. In most countries the government is responsible for setting the minimum wage in various sectors of the economy. Various trade unions and other employees’ welfare groups have also engaged employers in talks aimed at increasing the minimum wage. They use collective bargaining agreements in their engagements which are legally binding to the parties.

These unions seek to stop employees’ exploitation by ensuring the employee’s output matches with their pay. Labour costs determine the number of people a firm and an industry can employ. Increased costs of labour lower the employment rate thus leading to increased unemployment level. Unemployment is a state in the economy where those who are willing and able to offer services but are unable to get jobs. There are various forms of unemployment that exists in a given economy.

There has been a wide spread debate on the effect of the minimum wage on employment with argument being put forward for and against. This paper seeks to explain the various arguments that have been put forward about minimum wage with further explanation of the effects that the minimum wage has on the level of employment in a given economy. The global work force has faced stagnating wages over a long period of time irrespective of the prevailing economic status and the performance of the firms in which they are working. Economists have for a long period been at the forefront in opposing minimum wage setting. The wage floor provides the minimum point at which the salaries of labourers should not go below.

The economic theory of minimum wages seeks to explain the effects in monetary terms arising from government and social policies on the economy. Each country has its economic principles that guide it in building its economy. Minimum wage is an important aspect of the government policy on its citizens. It seeks to ensure that all employees in the private and public sector earn a decent pay as well as lead a quality life, thereby having a living standard that is above the poverty line. Various economic changes such as inflation necessitate the government to set the minimum wages.

Employers tend to hire more part time workers so as to avoid paying overtime to their permanent staff. Minimum wages are usually enforceable in law, and therefore, employers always ensure that they satisfy these legal requirements or face government interventions, labour disputes and legal battles. There are various effects of setting the minimum wage on firms, industry as well on the individual employees. Sometimes, setting the minimum wage leads to increased income tax liability, especially in economies where progressive tax system is used. Increase in wages may lead to an employee getting tax brackets that are higher than before, and therefore, they have to pay more in taxes than what was anticipated.

Increased wages also leads to increased company expenses which may sometimes be untenable. The increased expenses make firms lay off some employees in order to remain competitive and profitable. The theory of demand and supply is supposed to regulate the labour market, and therefore, set the minimum wage at the equilibrium. Entry of wage control leads to distortion of this equilibrium, and therefore, the demand and supply curve will shift the equilibrium to match with the minimum wage set. During high seasons, firms tend to increase their production to match with the market need.

To increase their production, the companies require additional labour supply. When minimum wage is set, companies are unable to hire employees, and consequently, market inefficiencies occur since the demands do not match the supply. The minimum wage is set specifically to help non skilled employees. The skilled employees always negotiate their pay prior to employment and have labour unions that engage their employers on salaries increases. The organizations agrees with skilled workers on the level of payment to ensure the wage expense is sustainable in the foreseeable future and matches with the cost of doing business as the company may desire.

The price theory seeks to explain the role of price in a given economy. Price refers to the cost of acquiring the benefit of a good or service usually expressed in currency form. The forces of demand and supply are used to set the price in a free economy. There various forms of prices such as selling price, trading price, bid price, transaction price and asking price. A wage is the price paid to workers which may be done on hourly, weekly, after a fortnight or monthly basis.

Prices are used to indicate the value of a good or service. Labour is a service that wages is paid for. In order to appreciate the value of service offered by employees the minimum wage is set. Prices vary from one sector of the economy to another as it does vary from one good to another. The argument for the setting minimum wage includes retention of low skilled workers due to improved wages, alleviation of poverty levels.

The pros include employers avoiding low skills low wage workers thus increasing poverty level. Fewer workers are employed when the equilibrium wage is lower than the minimum wage. This is because employers avoid this high cost labour and invest in other inputs of the production such as capital. The effect of this new scenario is increased product prices thus reducing demand for labour hence reduction in employment levels. Since minimum pay wage does not affect the high skilled workers, most firms opt to hire more skilled workers.

This is referred to as labour to labour substitution. The purpose of minimum wage being to assist the low skilled workers then loses its meaning since it was intended to help the unskilled workers rather than make them unemployed. There exists monopsony in the labour market where there are some firms with policies that tie their workers to the firm for a certain period of time. Employment elasticity is used to measure the change in employment as a result of change in minimum wage payable to workers. Major studies have been carried out in the United States to determine the effect of the minimum wage on its citizens in employment.

The focus has been on the employment level of young people. These studies have consistently proved that setting the minimum wage payable to low skilled employees results in destruction of jobs. All the studies carried on the effect of the wages, only 8% indicated positive effect of setting minimum wage. The only exception to this study was the study conducted in 1992 in New Jersey on fast food restaurant. The study was compared with similar one in Pennsylvania where there is no setting of minimum pay. Results of the study indicated increase in the employment levels in the fast food restaurants. There was a positive elasticity of 0.73. However, later studies in the area showed negative correlation between minimum wage increase and employment levels in the same fast food restaurants. Other studies in the recent days have indicated that when economic conditions have been factored in the study, they have revealed that minimum wage setting has resulted in increased employment. This is a result of declining labour supply of low skilled jobs especially that which is offered by young people.

Georgiadis observes that the major argument for minimum wage has always been to alleviate the poor levels of the low income earners (970). The increase in salary results in increase in their standard of living. Low income earners do not mean low income families, and therefore, the intended purpose may not be achieved. Sometimes, low income families may not have low income workers and this policy of minimum wage increase may have no effect on them. Some families may also have no one in employment and therefore this policy of minimum wage is not of any use.

Studies in the United States have revealed that the minimum wage has no compelling effect on low income families. In order to help the poor, other policies must be incorporated by the policy makers in order to serve this purpose such as floor wages. The United States enacted the earned income tax credit as a policy tool of solving this problem that minimum wage failed to tackle. The aim of the policy enactment was to offer low income earners subsides, thus enabling, able and willing citizens to join the labour market. Poverty levels were found to be very high in families where women are bread-winners such as single mothers and EITC showed positive effect on the income levels of these families.

It offers labour supply incentives to the members of these families. More people will be willing to join the work force if the minimum wage is increased and the adoption of the EITC thus increased workforce supply competition in the labour market. This is applied in the United States to support and stimulate employment levels especially to single women. Results indicate that unemployment effect occurs in different regions as well as different income levels in the society. It is clear that higher minimum wage does not improve the economic status of low income earners families and poor families.

This is as a result of employers getting discouraged from employing low skilled workers as result of increased minimum wage. The minimum wage is aimed at low income earners as opposed to high income earners. The program only works if only combined with other policies thus it is ineffective if it is implemented alone. Card, Katz and Krueger indicate that minimum wage was first enacted in New Zealand, Australia followed and later in United Kingdom. There are other countries which still don’t have the minimum wage policy though the rates differ in each country depending on its economic status.

The gross domestic product can used to measure the economic status of a country in offer to set the minimum wage rate. Other factors to consider include demand and supply levels of labour, costs of business operations, growth in productivity levels, rankings on economic freedom, living standards, prevailing rate of wages, inflation and terms of employment existing in a given economy, where there demand of product is highly inelastic employment is not affected by minimum wage policy in some industries. This is possible where the additional costs arising from increased labour cost are passed to consumers through increased cost of their products. In circumstances where minimum wage does not result in increased cost to the firm the employment levels are not affected.

Sometimes the cost of training workers may exceed the minimum wage thus a firm may prefer to increase the minimum wage than train. This has the effect of maintaining the employment level in its current state. In certain countries such as the United States they set the minimum wage close to the equilibrium wages prevailing in the market and therefore setting minimum wage has no major effect on the existing employment levels. This is done for the unskilled workers. Economists have not supported laws on minimum wages as opposed to the general public.

Their opinions are dependent on costs and benefits one accrues from the minimum wages. The argument in favour of minimum wage comprise of the following. The laws encourage consumption since more money falls into the hands of poor and low income earners inform of welfare payment. The small businesses owners get positive impact. It leads to workers opting to train thus attain higher paying jobs.

The vulnerable people standard of living is improved. efficiency and automation in industries is encouraged. As the price of labour increases business adopts technological development to increase their efficiency. Little earners tend to have more work ethic as employers requires them to do to match with the pay they are getting. The government benefits from reduced welfare costs as the little income earners are able to support themselves. The minimum wage laws discourages little income earners from engaging in illegal activities such as drug peddling since the pay is encouraging them to work in formal employment.

When wages increase those who were working for long hours tend to reduce their working time thus enabling other to gain employment opportunities. Those who oppose minimum wage do so for the number of reasons. Economists’ Neumark and Wascher argued that the minimum wage policy itself alone cannot completely or effectively deal with poverty as those who are not in employment do not benefit in any way (497). The living wage could be higher than the minimum wage therefore poverty level will still remain at its level. Inefficiencies in the labour market may arise when there is economic down turn as firms cut costs for survival.

Small businesses that have insufficient funds are the most hurt as compared to the large firms. They may end up collapsing when they are unable to meet these costs. The demand of workers decreases as firms try to deal with increased costs. Price inflation may occur as firms try to recover increased labour by incorporating them in the product price. The benefit accrues to some workers as opposed to the poor in the society who do not necessary be workers.

The poor may be enticed to enter the job market thus discouraging them to further their education. Jobs may be moved to other areas where labour costs are low. The end result of minimum wage policy may be long term unemployment. Countries in the process of setting minimum wages should consider the pros and cons on employment levels in the country. The policy makers can use other measures to address social problems the population is faced with such as poverty among others.

These alternatives include negative income tax, provision of social welfare through minimum income guarantee, and use of refundable tax credit.

References

• Card, David, Lawrence F. Katz, and Alan B. Krueger. "Comment On David Neumark And William Wascher, 'Employment Effects Of Minimum And Subminimum Wages: Panel Data On State Minimum Wage Laws'." Industrial and Labor Relations Review, vol. 47, pp. 487, Web.
• Georgiadis, Andreas. "Efficiency Wages And The Economic Effects Of The Minimum Wage: Evidence From A Low-Wage Labour Market." Oxford Bulletin of Economics and Statistics, vol. 75, Web.
• Neumark, David, and William Wascher. "Employment Effects Of Minimum And Subminimum Wages: Reply To Card, Katz, And Krueger." Industrial and Labor Relations Review, vol. 47, pp. 497, Web.
• Neumark, David, and William Wascher. "Employment Effects Of Minimum And Subminimum Wages: Reply To Card, Katz, And Krueger." Industrial and Labor Relations Review, vol. 47, pp. 497, Web.