Question

Discuss the pros and cons of market pricing versus regulated wages from an economist’s point of view.

Answer 1

Pros of market pricing:

• In case of market pricing, the firms can benefit from the low wages if the supply of labor is more than the demand. It will decrease the cost of the product and benefit the consumer from the lower cost increasing their surplus and quantity demanded of the good. In regulated price market, the wages don't come down below a point it also keeps the price of the goods fixed at that point. If the prices fell the firm has to shut down but it can't reduce the wages much.
• Exports get cheaper if the labor supply is more and the country benefits from the comparative advantage it has. COuntries lose some of their comparative advantages if the minimum wages are high.
• It allows the firms to hire more at a lower cost and reduce unemployment. Unemployment remains because the firm can't reduce the wages below a point and increase the number of people hired.

Cons of market pricing:

• Exploitation of labors: If the labors don't have much of the bargaining power they might be forced to work at a very low wage and get exploited. A minimum wage prevents this situation.
• Fall in the standard of living: If the market is allowed to work on market pricing the standard of living of the labor will fall in case of a glut in the labor market. Fixed wages prevent that from occurring.