Question

On 08/08/2018, the New York City Council passed a set of bills aimed at ride-hailing services that forces the companies to pay drivers a minimum wage and set a cap on how many cars can be on the road. The guaranteed wage had to rise to $15 in December of 2018.1 Using a supply and demand diagram, illustrate the effect of the newly introduced minimum wage. Use the diagram to show those who are helped by the minimum wage and those who are hurt by the minimum wage. Do you think the total paycheck collected by all Uber drivers increased in 2019? Think how elasticities of supply and demand can help you answer this question! What is your opinion on minimum wage laws? Argue

Answer 1

Minimum wages refer to the least amount of payment, which an employee can be given. This is decided on the basis of various factors such as average payments for nutrition, healthcare, housing, education etc. This wage helps countries in maintaining a minimum standard of living for a person and is largely seen as a move that helps in elevation of the poor sections of the society.

A minimum wage graph describing the demand as well as supply and the net effect of the same is as follows: -

In the above diagram we see that the initial equilibrium takes place at point Q. Once the Minimum wages are put into place, which increase the cost, the demand for cab drivers shrinks to Q1 while, the supply increases to Q2. This is because consumers need to pay additional money to drivers to avail their services and therefore some people look towards alternative modes of transport. On the contrary, since drivers get additional income on the number of hours they work, they increase their supply which moves to Q2.

Therefore, we can say that due to the concept of minimum wages, drivers are better off while those demanding for them need to pay additional amount of money towards getting these services.

Total Pay Check: -

Now when we talk about total pay check which is received by an Uber driver, we need to evaluate the elasticity of demand. As explained in the above example, the total payment which drivers receive as a result of the increase in minimum wages will indeed increase over a period of time once the system is adopted. Even though, some people may shift to other modes of transport, their extent would be much lesser because cab services do not have a highly elastic demand. People will accept the increased prices which has indeed resulted in their pay checks being higher than they used to be.

Elasticity of demand refers to the degree of change in demand as a response to a relative change in prices. In the current scenario even if there is a rise in price, the decline in demand will not be great to limit the rise in income which people will generate as a result of the rise in minimum wages.

Opinion towards Minimum Wages: -

Minimum wages are essential for any economy wherein we want to elevate the poor and help them with access to education, healthcare, nutrition etc. It ensures that the poorest sections of the society are not exploited by corporates or by people who are well off. It allows them to have a respectable standard of living.

Therefore, it should largely be seen as a positive measure which will help in reduction of poverty and achieving goals of income equality in a nation which are some of the primary goals for any government.

Any apprehensions on this need to be handled by reviewing Minimum wages periodically and being flexible and not rigid on the approach of increasing minimum wages so that both sections of the society i.e. those demanding for labour and those supplying the same are benefitted.

Please feel free to ask your doubts in the comments section.