Question

What are the pros and cons of higher minimum wages? Breifly talk about If you are a supporter or not of higher minimum wages.

Answer 1

Ans) Minimum wage is an example of price floor. Price floor is the legal minimum price that must be paid for any product. A binding price floor is above the equilibrium price.

So a binding minimum wage is above equilibrium wage rate.

Pros÷

• a minimum wage ensures right pay for the workers.
• It increases labour productivity as workers feel more motivated.
• Reduces moral hazard as workers have more opportunity cost.
• May help improve the status of poor.

Cons÷

• Minimum wage creates surplus or structural unemployment.
• It might harm more workers than it benefits. Therefore may lead to more poverty.
• Could lead to shutdown of small firms.
• Could lead to black market.

Although minimum wages are necessary to ensure that workers get right pay, it is also necessary to ensure that minimum wages are not too high. Otherwise bad effects of minimum wage will offset the good effects of minimum wage and the very purpose of it will be wasted.

Surplus here is unemployment.