Question

6D1. Do you think the minimum wage law is an economically efficient means of reducing household poverty? Why or why not? What are some other ways that might be more efficient for this purpose? Suggest two or three viable measures.

Answer 1

Minimum wage law is the lowest remuneration that an employer is legally bound to pay his employees. It is like a floor price below which an employee may refuse to sell his labour. It can be set by a competent athourity of the country, wage board, labour court or tribunals.

In my opinion,the effectiveness of minimum wage legislation in reducing poverty is debatable. The negative aspects of minimum wage legislation are as follows:

1. Higher minimum wage could push up the cost of production which may lead to lay offs especially in smaller firms.
2. The benefits of minimum wage legislation may not reach the real poor.
3. In order to avoid payment of higher wages, firms may adopt capital intensive technology leading to further unemployment.
4. In order to keep the cost of production low, firms may also resort to outsourcing their jobs to countries where cheaper labor is available.

Thus, the law which is actually meant to benefit the employees belonging to the poor section of the society may not be benefitted and further it could go against their interest.

The reason given by those who favour minimum wage legislation is that it helps in improving the standard of living of poor households but there are other measures also which can serve the purpose. Some of them are as follows:

(i) Earned income tax credit

It is a refundable tax credit for low and moderate income workers, particularly with children.

(ii) Guaranteed basic income program

Under this program, a worker is given a minimum income, whether or not he is gainfully employed.

(iii) Tax reduction for small businesses

Giving tax concessions to small businesses will induce them to expand their operations and hence create more job oppurtunities that will eventually benefit the poor.