Advantages and disadvantages of minimum wage.

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Raja H R Bobbili,

IB 1

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. However, to the Keynesian economists, it is acceptable to have minimum wages imposed if they will trigger a multiplier effect and encourage growth and expansion, especially where there is under consumption or the economy is operating below the production possibility frontier (PPF).

The government determines the minimum wage through an annual survey which links it to the living wage, and the Retail Price Index (RTP). The real wage or the purchasing power of workers is determined through the study of a ‘basket’ of goods, selected at random. This basket consists of items that an average family consumes for their living, and which are weighted for their importance. Inflation of this ‘basket’ of goods is taken into account. From the survey of this ‘basket’ of goods, the living wage and the Retail Price Index are found. The living wage is the money which can sustain an average family, consuming this ‘basket’ of goods. Retail Price Index is the indication of changes in the value of money, or inflation of this basket of goods. After considering these factors and the previous year’s family expenditure report, FEP, the government revises its minimum wage policy before releasing its annual budget.

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Opportunistic employers tend to fix low wages in order to maximize their profit margin. One main advantage of minimum wage is that it protects workers from employer-manipulation. The minimum wage legislation ensures that workers are paid equitably. In the long term, it ensures that they can afford better basic, medical and educational facilities. This has an effect on the productivity of the nation’s labor force. Not only does the minimum wage ensure that workers are paid enough to afford facilities to sustain better standards of living but it also acts as an incentive to workers to ...

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