Question

Discuss the minimum wage.

Specify the benefits and costs of the minimum wage to the economy.

Under what circumstances will most economists support minimum wage laws? Justify your answer.

Answer 1

Minimum wage as the name suggests is the minimum cost at which the employers can hire labors in an economy. It's basically a price floor below which, legally an employer cannot hire a human labor.

Benefits of such minimum wage are manifold. Let's take a look at some of them:

• Regulates the standard of living in a country. When a minimum wage (assuming real wage) is set, the purchasing power of an average worker increases and thereby household consumes more which improves the standard of living.
• Lifts up people from poverty. A majority of people pushed to poverty are ready to take up any jobs, no matter what the wage with a hope that they can make the ends meet. Often, this wage is not sufficient to run a household. Hence a minimum would mean that poor people could at the least make their ends meet.
• Efficiency in work increases as the employees' morale are boosted by these price floors as they are earning more than before for performing the same work.

Despite a manifold of benefits, there are some downturns as well. Let's look at some of the costs to the economy in a minimum wage scenario:

• As economy grows the minimum wage needs to be adjusted to the inflation rate as well, thus fuelling the inflation. How? When more people have the purchasing power the market demand for commodities increase and the supply side will be overwhelmed. Therefore prices increase causing inflation.
• Employers might be forced to cut jobs to maintain the profitability of a company under a minimum wage scheme. As the firms which usually pay low to the workers enjoy massive profits, in order to bring back the same under the new scenario they cut jobs so that the firms need to pay less for the overall labor and the minimum wage as well as profits are not compromised
• Due to minimum wage the demand in the labor market increases with overqualified people readying themselves to work for the minimum wage.

Economists argue that minimum wage laws should be best suited in a post depression economy wherein the main agenda is to restore the purchasing power of the households. This preserves the bargaining rights of these consumers and ensures that they can consume the necessary goods within their wages. In simple words, The minimum wage laws needs to ensure that these wages are adjusted to inflation because $7.25 /hr might be sufficient in 2020, but maybe not after 10 years. One of the ways to polarization the effects of inflation on the bottom level of the economy is to establish a minimum wage.

Hope this helps. Do hit the thumbs up. Cheers!