Introduction
Labor constitutes a fundamental factor of production, and it is one of the determinants of services and commodity prices. It entails human efforts used in the creation of goods and services, and its rewards are salaries or wages. Unemployment is one of the major economic problems facing many countries, especially developing ones. Attaining full employment level is the objective of most governments since it is an essential driver to achieving economic growth and development. In most developing countries, labor markets are poorly developed, and wages are determined by market forces of demand and supply. As such, labor is poorly rewarded due to high supply and low demand in the industrial sector which is less developed in developing countries (Boyes et al. 68). Governments enact laws such as minimum wage legislation, which state the minimum wages that should be paid to protect citizens from oppression (Lang and Kahn 69). The minimum wage has long run economic benefits to a country. Therefore, it should be raised and maintained.
Fundamental concepts of economics
Human beings strive to allocate limited resources among unlimited wants. Thus, the problem of efficient resource allocation is the central focus of economics. Positive economic analysis entails the analysis of economic statements, which are objective and factual (Boyes et al. 41). It is concerned with facts which can be tested using economic models. On the other hand, normative economic analysis is concerned with the analysis of economic statements that place value judgments about the fairness of the economy. Normative statements are based on opinions, and they cannot be tested empirically using models. Economic models entail theoretical constructs used to analyze an economic phenomenon such as market equilibriums. They involve the expression of relationships between two or more economic variables, holding other variables in the model constant.
The concept of scarcity relates to the limited nature of economic resources and the efforts that society put to maximize the productivity of the available resources (Sexton 73). Human wants are endless and insatiable. As a result, choices have to be made concerning the prioritization of needs to determine the order in which they should satisfied. The society and individuals rank their needs on a scale of preferences starting with the most pressing. Since all needs cannot be satisfied at once, one has to forego some needs to meet the other. Opportunity cost entails the value of the best alternative that must be forgone to meet another need.
Effects of government interventions in the markets
Market forces do not always produce the desired results. Sometimes they lead to great inequalities in the allocation of resources. Thus, government intervention is essential to correct market imperfections and promote fairness (Salanié, Bernard, and Salanie 129). In the labor market, government intervenes through various mechanisms such as minimum wage legislation. In developing countries, governments set the wage floor and specify standard working conditions to protect workers from exploitation. The majority of people in developing countries are unemployed. Therefore, setting high minimum wage helps in poverty alleviation. For example, increase in minimum wage between 2005 and 2007 in the United States from $5.15 to $7.25 per hour promoted living standards and reduced poverty level (Card 24). Additionally, a high wage floor increases consumption and savings levels in an economy. Increased savings foster economic growth through multiplier effects.
Taxation is another tool that governments use to regulate markets. In most countries, a progressive tax system ensures that a large proportion of income is taken from the rich and used to provide basic facilities to the public. High tax tends to reduce the disposable income resulting in low consumption and savings (Boyes et al. 147). Market prices for goods and services also respond to taxation. Imposing high tax on consumer goods leads to high market prices resulting in reduced demand. High tax is a disincentive to producers since it leads to high production costs. Producers tend to reduce their production or even close their business if there is heavy taxation. Consequently, the demand for labor declines leading to high rate of unemployment. External trade has a significant contribution to economic growth in developing countries. Domestic industries in these countries depend on imports for raw materials, human capital, and technology. However, governments regulate external trade through tariffs, import duties, and other forms of trade barriers. According to Sexton (172), high import duties discourage importation resulting in price inflation and breakdown of local industries due to high production costs. The ultimate impacts fall on the society which suffers the lack of employment opportunities and high prices.
Market failures and potential solutions
Market failures entail inefficiency of markets in the allocation of resources. One of the primary forms of market failure is negative externalities which entail spill-over effects of production activities (Cowen 53). The market value of the products does not reflect the social value since production activities result in some harmful effects such as pollution. Market forces result in inequality in income distribution. Inequalities lead to the formation of income and social classes among members of society. The correction of market imperfections is mainly through government interventions. Governments use price mechanisms to modify behaviors of producers and consumers who are the key players in the markets. Enforcement of legislation also has a significant impact in correcting market failures.
Features and implications of competitive and non-competitive market structures
Competitive markets constitute of firms dealing with similar products. Wages are determined in the markets and taken by all firms in the industry. The supply of labor is highly elastic implying that any attempt to reduce wages results in a significant reduction of labor supply. Firms offer opportunities to a similar type of labor whose supply is highly mobile. Due to the high supply of labor, minimum wage rule is often violated, and firms negotiate wages with individuals. On the other hand, non-competitive markets are dominated by few firms and high labor supply. As such, firms determine the wages depending on the quality of work they need. The industry in a non-competitive market influences the behavior of the society by varying wage rates. Firms raise wages to attract more labor when demand is high.
Conclusion
The importance of minimum wage should not be overlooked. Economic growth depends on factors that make up the expenditure function. Consumption level determines the GDP of a country. Raising the minimum wage will trigger economic growth through the multiplier effect. Therefore, governments should adopt policies that support the maintenance of high minimum wage.
Works Cited
Boyes, William, Michael Melvin, and Boyes. Fundamentals of Economics. 3rd ed. United Kingdom: South Western Educational Publishing, 2005. Print
Card, D. “Using regional variation in wages to measure the effects of the federal minimum wage.” Industrial and Labor Relations Review 46.1 (1992): 22–37. Web
Cowen, Tyler, ed. The Theory of Market Failure: A Critical Examination. United States: Distributed by arrangement with University Pub. Associates, 1988. Print.
Lang, K. and S. Kahn .“The effect of minimum wage laws on the distribution of employment: Theory and evidence”. Journal of Public Economics 69.1(1998): 67–82. Print
Salanié, Bernard, and Bernard Salanie. The Microeconomics of Market Failures. Cambridge, MA: MIT Press, 2000. Print.
Sexton, Robert. Exploring Economics. United States: Cengage Learning, 2015. Print.
