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What are the possible impacts of minimum wage legislation in the short-run and in the long run?

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Introduction

Q2. What are the possible impacts of minimum wage legislation in the short-run and in the long run? Minimum wage is defined as "the lowest wage that can legally be paid to a particular group of workers" (Fischer, Dornbusch and Schmalensee, 1988, pg. 443). In my answer, I have to basically state the consequences of the government setting the lowest wage rate that has to be legally paid to a worker both in the short-run and in the long-run. The basic difference between the short-run and the long-run is that the former refers to a period of time during which some of a firm's inputs cannot be varied or in which a firm or household has not fully adapted to a price change whereas the latter is the exact opposite. I will begin answering the question using the labour market diagram in identifying the dis-equilibrium with minimum wage and then stating the possible positive and negative impacts of imposing minimum wage both in the short-run and the long-run. The forces of demand and supply are used to determine prices in the labour market whereby the prices of labour (wages) are determined by the interaction of the demand and supply for labour. ...read more.

Middle

Workers would also be highly motivated in their workplace as 'good' workers stay to enjoy the wage premium whereas there would be incentive for 'bad' workers not to slack as they will lose the wage premium if they are sacked. (Piesse, 2003, Lecture 14) This would further induce a relative increase in general earnings as workers who were previously earning more would demand for a further wage rise to maintain the pay differentials. At the same time, pay differentials between males and females would tend to reduce if it had existed. Women who were previously paid less then men due to the difference in gender would now be paid the same equal amount with the minimum wage legislation provided they are performing the same task. There would be equality amongst workers performing the same task regardless of anything. More importantly, labour turnover and absenteeism would decrease drastically with the minimum wage legislation as on a whole, more people would be looking forward to work and be committed to it. In the long-run, inequality between the rich and the poor would tend to reduce as workers that were poorly paid previously would now be paid the higher minimum wage at the least. ...read more.

Conclusion

However, in my view, there are several factors that should be taken into account before deciding upon the true nature of the outcome of imposing minimum wage. For example, if the minimum wage is set below the equilibrium level (price floor), a country may benefit enormously from it as it is seen with the UK. Millions of workers have been better off in terms of a general increase in the standard of living and an increase in the quantity and quality of resources (labour) in the UK. Also, I think the impact of a minimum wage on employment levels depends on the elasticity of demand and elasticity of supply of labour in different industries. If labour demand is relatively inelastic then the contraction in employment is likely to be less severe than if employers' demand for labour is elastic with respect to changes in the wage level. For example, labour-intensive sectors like retail, catering and cleaning would have a deeper impact with minimum wage legislation than others. Overall, in my opinion, minimum wage legislation has more advantages than drawbacks to it at least in the short-run. In the long-run, provided that minimum wage set is not noticeably higher than the equilibrium level, it would still be advantageous to have it as it can seen from the advantages mentioned before. ...read more.

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