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Advantages and disadvantages of minimum wage.

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Advantages and Disadvantages of Minimum Wage Wage, one of the rewards of the factors of production, is the price of labor for its contribution to production. In a free market system, wage is determined through the interaction of market forces of demand and supply. In earlier times, the Iron Law of Wages, doctored by David Ricardo in 1817, was held by many classical economists who felt that wages were flexible upwards and downwards, depending upon shifts in demand and supply. It was discovered later on that wages determined by market forces were much below what the workers deserved for their mental and physical work. The workers were receiving what was termed 'salvation wages'. To protect workers from exploitation by employers, government legislation was needed. Therefore, minimum wages were imposed. A minimum wage is an artificial wage imposed on the market by the government in order to ensure that workers were paid their righteous wage. The minimum wage, when implemented, ensured that no employee accepts below that wage. As is shown in the diagram below, a minimum wage is often above the market equilibrium. This is a form of direct government intervention to regulate the economy for macroeconomic stability. This is a policy which the monetarist economists do not endorse. ...read more.


For example, in the year 2000, when Bill Clinton increased the minimum wage from $5.15 to $6.50, employers in Washington Sate alone saw that labor costs increased by a total of $204 million per year. As a result, employers preferred to substitute labor with capital. They also preferred to hire short-term casuals and lay off their permanent workers, who were expensive to maintain. Some even preferred to get the regular paper-work done abroad at cheaper cost. This resulted into massive unemployment. As a result, 7,431 workers lost jobs in Washington State alone. When workers were laid off, ethnicity and age happened to be one of the factors. Most of the people that they laid off were workers who were young (between the ages of 19 and 23) and ethnic minorities. Therefore, a 2.8% increase in family income caused 7,431 people to lose their jobs, social problems to spark up, and company expenditure to rise sky-high. On a long-term basis, minimum wage can be a major disadvantage for the economy. It should be noted that the worker unions do not consider extensively the unemployment that will be caused by their demands for higher minimum wages, if not accompanied by an increase in labor productivity. If a minimum wage is increased, the employer will feel obligated to lay off workers unless workers are prepared to increase their productivity, denoted by the value of the marginal physical productivity of labor. ...read more.


This was part of the recommended Structural Adjustment Program meant to reduce labor costs and to bring about a sustainable, motivated and efficient labor force in the civil service. Following IMF's recommendations, the government initiated the Public Sector Reform Program (PSRP) which was meant to reduce the wage bill by cutting down workers and not granting minimum-wage increases. Therefore, any minimum-wage increases asked for by worker unions have been declined by the government in accordance with the policies of the Public Sector Reform Program (PSRP) and the regulations set by the Highly Indebted Poor Countries (HIPC) initiative. Ironically, it has been observed that new posts have been created in the government. When the government did not have money to increase minimum-wage, how did it have enough money to create many new posts, like that of the District Administrator (DA)? The practical reality of minimum-wage increases lies beyond economically-defined advantages and disadvantages that this essay has covered. On a global level, minimum-wage increases are determined more on the basis of politics than economics. Acknowledgements The following sources of information have been consulted: Modern Economics 7th Edition, Jack Harvey, Palgrave Publishers, 1998; New York, USA Economics 2nd Edition, Alain Anderton, Causeway Press, 1995, United Kingdom Economics for GCSE, Alain Anderton, Collins Educational, 1986, United Kingdom GCSE Economics Revision Guide; Barry Harrison, Longman; 1989; Singapore The following sources have been used for statistical information: http://www.ncpa.org/hotlines/min/pd050599a.html http://www.ncpa.org/hotlines/min/june98b.html http://www.cato.org/pubs/pas/pa106.html Raja H R Bobbili, IB 1 ...read more.

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