Question

Please Google the document "David Neumark Employment Effects of Minimum Wages" and click the first link.

Based on the available evidence, is the minimum wage an efficient way of addressing income inequality issues? Why or why not?

Answer 1

ILO defines minimum wage as “the minimum amount of remuneration that an employer is required to pay wage earners for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”

(Source: General Survey concerning the Minimum Wage Fixing Convention, 1970)

Simply saying, minimum wage is a legally mandated price floor below which non-exempt workers may not be offered or accept a job. Thus it is a minimum socio-economic security offered by any government to the labourers to have a decent standard of living. Actually the main purpose behind this minimum wage rate is to protect the interest of the workers in the labour force and to stabilize the economy in terms of maintaining the aggregate demand.

When we address income inequality in terms of minimum wage rate, undoubtedly one can say that minimum wages enhance the income equality in the economy by reducing the existing inequality in terms of income between the different income groups to a certain extent.

The main dimensions of effective minimum wages are

1. Coverage: Afford protection to all workers

2. Compliance: Workers comply with minimum wage regulations

3. Level: Cover the needs of workers and their families

In these ways minimum wages provide socail security and economic stablity to the labourers. If these minimum wage law is implemented strictly by the Government authorities, the needs of the labourers will be protected and they will earn a favourable income to lead a better life then before. If we apply the relative income hypothesis of James Duesenberry in this context, it clearly defines that a person will not be lowering his consumption from the previous level due to the ratchet effect and he will be trying to increase his consumption due to the demonstration effect. Thus to ensure this minimum standard of living and to keep an effective aggregate demand in the economy minimum wages are essential. Only thus we could decrease the inequality gap between the low income group and high income group to a ceratin extent.