Introduction: The mitigation of poverty is increasingly seen as a primary economic objective. Poverty creates many economic costs in terms of the opportunity cost of lost output, the cost of welfare provision associated with exclusion from normal economic activity. It can be argued that one of the roles of government is to reduce poverty, and the minimum wage law is a in a typical way that government used to reduce poverty (Sloman, 2010). However, it also creates many debates around minimum wage laws. Proponent of minimum wage believe is a way to help the poor I the society.
Opponent view it as a factor of unemployment. This essay will centrally discuss how the minimum wage law influences on the labor market over time, and next will analysis the extent to which minimum wage law would give a negative or positive effect on the poverty people. And final will draw a conclusion and also give some recommendation for implementing minimum wage law. Task a: A minimum wage law is a piece of legislation that prevents businesses from hiring workers for hourly wages that fall below a specified level (Field, 1984).
The minimum wage law intends to ensure that low-paid workers receive fair compensation for the work they do. Thus, introducing a minimum wage can theoretically guarantee that workers will be able to afford to pay for the necessities (Hammermesh, 1982). A minimum wage can either be above or below the equilibrium price as shown by the lines 1 and 2 in diagram A. The equilibrium price is the price at which the quantity demanded for a good or service is equal to the quantity supplied (Anderton, 2008).
The line 1 is the minimum wage was below the equilibrium wage, and the market wage rate will be adjusted by balancing the labor demand and supply. Line 2 is the imposed minimum price is above the equilibrium price. In such case, the quantity of supply is greater than the labor demand. So it will create a surplus in the labor market. According to Mankiw (2006), “surplus is a situation in which quantity supplied is greater than quantity demanded. ” The degree of the effect basically depends on the elasticity of demand.
For the highly skilled and educated people who are well paid and even outdistance the market equilibrium wage rate it will be ineffectiveness (Sloman, 2010). It can be shown in the diagrams at below: The diagram B, which shows a labor market that the more elastic labor demand is and diagram C that present the market with less elastic labor demand. It clearly sees the difference between supply quantity and demand quantity of diagram B is greater than the diagram C. Therefore, the labor market with more elastic demand curve tends to bring a highly level of unemployment.
But for those highly skilled workers will remain employed and merely a little part will lose their job. On the other hand, the influences are also relying on the amount of the substitutes in a certain industry. Suppose, the employees work for a kind of sector with a lot of choice, it will be easy for their to swap to the other company. But for those working for an industry with limit substitutes, they will difficult for them to transfer (Mankiw, 2006). From the above discussion, it can be concluded the implement of minimum wage legislation will have a great influences on the people living in poverty.
So task B will analysis the negative and positive effect of minimum wage law on the poverty people. It will begin by viewing the positive effect, and then follow with the negative sides. Task B: Obviously, a minimum wage increases the amount of income of the lowest wage earners make and hence increasing purchasing power among those people, and then provide stimulus to the economy by ensuring that the poverty in society have a contribution to the consumer-based economy (Kennan, 1995).
It also helps to close the income gap between the rich and poor. It can be also express by the diagram D at below: From diagram D, the demand curve shift out, the quantity of goods demanded was increases and the price of goods also rises. Consumer spending is a major component of the gross domestic product (GDP), the measure of a nation's economic output (Anderton, 2008). Thus, the GDP will goes up. Besides, the income tax depends on household’s income. Due to the incomes increases, the tax revenue rises as well (Sloane, 1994). Without the binding minimum wage rate, workers are laid off, and most of them apply for state government subsidies (Brown, 1982).
So the government should spend most on the unemployment benefit, and less on the public facilities and education. In such case, the less help provide for the education, will decrease the demand of the education, then the number of unskilled and lower educational workers will goes up. Additionally, the minimum wage legislation is to make it illegal to hire anyone at the market rate for his employee, if the market rate is below the minimum rate. As the unskilled workers have the lowest wages, workers can derive some security from being guaranteed a minimum wage (Kennan, 1995).
This provides workers with basic rights, whereby they know how much they will continue to be paid as long as they can keep their jobs. On the other hand, introducing minimum wage law will lead to a higher labor costs. The increases in the labor cost is a factor that will shift the supply curve inwards, which shown by the diagram E at below: Diagram E demonstrates the supply curve shift inwards, the quantity of demand increase whereas the quantity of supply decreases. Hence, decreases investment of business, in turn to reduce the job opportunities, and so create unemployment (Field, 1984).
Moreover, businesses forced by the government’s imposed minimum wage, employers should pay for staff at a fixed minimum wage. Therefore, for some small businesses that cannot cover the higher wage rate, they can decide shut down the business because of the financial shortage or they can increase their prices, passing the additional costs on to their customers (Field, 1994). From diagram E it can be also seen the price of good rises, so it will create a price inflation. Inflation can be defined as the general price of goods goes up.
Furthermore, when the minimum wage conducted, employees who are working just meet the minimum wage may feel it is unfair that some workers who are low level of experiences and obtain the lowest wage will also get the equally payments (Brown, 1982). This can cause a drop in company morale. Because of the staff feel demotivated by the unequally payment. A reduce of employees’ morale will decrease the productivity and efficiency. In this way, the revenue of company will be goes down. Conclusion:
This paper has evaluated the potentially effects of the minimum wage legilation on labour market with the several useful graphs to illustrate visible. Subsequently, it was discussed about the negative and positve impact of minimum wage rate on people who live in poverty. It can be drawn a conclusion that the minimum wage legislation have both advantages and disadvantages, and it gives a huge impact on the unskilled labor market but less influences for the high-skilled workers. Overall, the value of benefits of minimum wage law are greater than the value of costs.
Therefore, it is essential for government to be careful when setting the minimum wage rate and avoid creating an extra damage, such as high level of unemployment in the unskilled labour market, which will cause the minimum wage law become invalid. Bibliographies: Anderton, A. , (2008). Economics, 5th ed. Essex: Causeway Press. Brown, C. , et. al, (1982) "The effect of the minimum wage on unemployment", Journal of Economic Literature, Vol. 20 Fields, G. S. (1994) "The unemployment effects of minimum wages", International Journal of Manpower, Vol. 15 Field, F. , Policy Studies Institute (1984) The minimum wage, Heinemann, London.
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