Question

Labor is an important component that affects the level of production in a company. However, sometimes the position of workers is very helpless in relation to the wages paid by the company. Therefore, the government as a regulator implements regulations that can protect the rights of workers.

If workers demand an increase in wages, what impact will this have on the side of the company as an employer, workers as an employee, and from the side of the government as a policy maker?

Answer 1

Labour wages would be different in different types of firms. In large companies, suppose if labours are underpaid, i e. wages are less than the marginal revenue product which they bring in, then the firms profitability stands increased by the difference in amount of underpaid wages from optimal wage rates. If labourers demand increase in wages in short term companies would have to readjust their budget as labour is one of the most important component of production.

Effect of minimum wages on -

1. Employees : creates less job opportunities among low skilled workers, losing out on-job training which could have raised wages in later years, no employee retention policy or incentives (as labour supply exceeds demand at minimum wage).

2. Companies: creates complacency at workplace ( assuming incentives improve productivity) , cause production distortions as companies have to readjust their budget and cost variables.

3. State : Though one section of workers gets benefited, majority of low skilled workers becone jobless leading to economic difficulties. Further unemployment affects growth and minimum wages may lead to wage(cost) push inflation.