Pros and Cons of Minimum Wage Summary

1. Reduced poverty The minimum wage can improve the living standard of low-income workers, which ultimately reduce poverty. According to the International Labor Office (2005), reducing poverty and working poverty requires both productivity growth and employment creation. The World Development Report 2004-05 also stated that there is strong empirical evidence that creating decent employment opportunities is the best way to take people out of poverty. As a result, the wealth gap between the rich and the poor can be narrowed.

The Keynesian argument for minimum wages – this suggests that lower-income workers have a high propensity to consume, and that with the extra disposable income from minimum wage, they will spend a high portion the sum which will be injected back into the circular flow of income. In regions and localities where average incomes are low, a higher minimum pay rate can boost total demand for goods and services and create a positive multiplier effect – but much depends on the effect of a pay floor on how many people remain in work.

2. Reduced government spending on social welfare Since workers are being paid more per hour, their increased purchasing power enable them to meet pay for their basic needs on their own, without relying on government “top-up” welfare benefits. Therefore, this can greatly reduce the government expenditure on the social welfare, and the spending can be used in other ways, such as education and medication.

Cons 1. Reduced employment of the less-skilled workers Implementation of minimum wage can reduce the employment of the less-skilled workers (Neumark & Wascher, 2008). According to The Wall Street Journal (2009), Economists for the Federal Reserve reviewed over 100 academic studies on the impact of the minimum wage and found overwhelming evidence that lower skilled and young workers have increased rates of unemployment when there is a higher minimum wage.

These workers are laid off as their employer finds that the employee’s labor is not worth the required wage, but additionally employers are filling these jobs with higher skilled labor (Garfield, 1996). Additionally, many others pointed out the importance of the entry level jobs and observed that the loss of these jobs would have a negative impact on the development of a good work ethic in young workers (Irvin, 2009). 2. Shift the cost to consumers The increase in the minimum wage has caused many of these small businesses to raise their prices just to cover costs (Messerli, 2009).

As labour is a factor of production, an increase in the average cost of labour will push up the unit cost of products. With the persistent increase in the general price level, there will be at a risk of inflation. 3. Difficult for small businesses to survive in the market Some small businesses may find it difficult to survive in the economy because they cannot afford to pay the minimum wage stipulated by the law. It obstructs their chances of growth and thereby hampers the economic growth in the larger context.

Though some of these companies would charge higher to the consumers, consumers may eventually decide that the high prices cannot be justified and the small business is forced to close (Messerli, 2009). 4. Shadow labour markets may develop Due to the surplus of labour, more people are willing to work at the minimum price than employers are willing to hire, and it is likely that workers will try to sell their services at illegally low prices. These workers are often, especially in America, illegal immigrants who are hired in favour of tax paying citizens.

This will cause a decrease in tax revenue as more workers are not reporting their incomes, and an increase in the amount of unemployment benefits the government will have to pay out. The minimum wage benefits those who are employed at it and disadvantages those who loose out on potential employment because of employers hiring from a shadow labour market.

The effect of minimum wages on unemployment will depend on the elasticity of demand for labour. If the demand for labour is inelastic, the introduction of minimum wages will only increase unemployment a little. Job losses may simply be due to the increase in labour cost which would result in a lower demand for labour. **** 5. Distortion to the free market Minimum wages are a barrier to the free market. If the minimum wage is set above the market clearing price, it will result in rising unemployment. Some firms will judge the opportunity cost of hiring an extra employee too high and this may prevent some workers from finding jobs who otherwise would normally find it.

In a totally free market, they may be willing to accept lower wages. However, even if the artificial barrier were not present, the action of trade unions would greatly limit the wage reduction that workers would tolerate. Rather than have the entirety of the workers in a union take a pay cut, it is more likely that some will be fired and the rest will continue work at the same wage rate. This means that even in a free market, the offer of lower wages can result in unemployment due to the effect of sticky wages.

Equally, in some cases, when wages drop too low, people are willing to forgo employment. This is because the benefits of being employed are hardly greater than the unemployment benefits they would receive otherwise. This is known as the unemployment trap and its result is that even in a free market, if the equilibrium price is too low, unemployment will rise. For the two aforementioned reasons it is impossible to say that the imposition of a minimum wage will definitely cause higher unemployment than if wages were left to the invisible hand of the free market.

Reference: Garfield, R. , (1996). “The Case Against a Higher Minimum Wage”. Retrieved March 9, 2012, from http://www. house. gov/jec/cost-gov/regs/minimum/against/against. htm International Labour Office (2005). World employment report 2004-05: employment, productivity and poverty reduction. , p. p. 31. Irvin, M. , (2009). “Minimum Wage Increase Pleases Workers, But Employers Not So Happy”. Retrieved March 8, 2012, from http://blog. al. com/live/2009/07/minimum_wage_increase_pleases. html Messerli, J., (2009).

“Should the Minimum Wage be Abolished (i. e. Reduced to $0. 00)? ”. Retrieved March 9, 2012, from http://www. balancedpolitics. org/minimum_wage. htm Neumark, David (Editor); Wascher, William L. (Editor). Minimum Wages. Cambridge, MA, USA: MIT Press, 2008. p. 104-105, 189-190, 258-259. The Wall Street Journal, (2009, October). “The Young and the Jobless”, The Wall Street Journal, at A12. Retrieved March 12, 2012, from http://online. wsj. com/article/SB10001424052970203440104574402820278669840. html.