There is no doubt that the issue concerning the effects of minimum wages on employment has a subject of debate in many debates and equally generating varied interpretations in many economic debates (König, and Möller 716). This paper discusses the economic arguments for and against the minimum wage and incorporates graphs of the labour market showing the impact of a minimum wage in monopsonistic and perfect competition markets. Whereas proponents of minimum wage argue that minimum wage enhances worker commitment, encourages equality in income distribution, aids in reduction of worker exploitation, and reduces government’s expenditure on welfare; opponents of minimum wage argue that minimum wage increases marginal costs, reduces a firm’s profits, and encourages cost-push inflation.
Neoclassical economists argue that a binding minimum wage brings negative employment effects because low-productivity workers to be priced out of the market. On the other hand, some section of economists argue that the effects of minimum wage depends on institutional settings and country specific analyses , and hence, it is often problematic to transfer results from one country to the other. From an empirical perspective, there exists an inverse relation between employment and minimum wage but the theoretical side requires a combination of a monopsonistic model in order to contest the existence of a relationship between the minimum wage and unemployment (König, and Möller 717).
The impacts of minimum wage on the labor can be accessed from the competitive market environment and as well, it can be accessed from the monopsonistic market. The effects of imposing a minimum wage on these markets vary according to the changes on labor market equilibrium. In this paper, the effects of minimum wage on the labor market are addressed by analyzing the arguments for and against the minimum wage in the competitive and monopsonistic market. Graphical representations of both instances will be covered.
Monopsonistic market
A monopsony refers to a market situation where there is one buyer and many sellers and hence, the buyer has absolute control the price by controlling the quantity. In the labor market, the seller is the worker, the buyer is the employer, the price the wage and the good is the effort and time. A monopsonistic employer ensures that the number of workers is low by limiting the number of hired workers.
Graph of wages against employment
A case for perfect competition
Wages
S
W⃰
W
D
Ed E Es
Employment
Considering a competitive market that operate at equilibrium the equilibrium wage is equal to W and employment at equilibrium is equal to E. The government can impose a minimum wage of W⃰ in the market and the minimum wage has universal average so that all workers in the labour market are affected by this new legislation. If the tendencies associated with paying less than minimum wage are sufficiently high then every employer will comply to this new legislation. Once a minimum wage is imposed as illustrated above firms will move up their labour demand curve , and employment will fall to Ed. This implies that some workers (E⃰-Ed) will be misplaced from their jobs and become unemployed. On the other hand, higher wages will encourage other people to enter the job market.
Es represents the current workers willing to work at W⃰ leading to Es - E⃰ number of workers entering the market and cannot find jobs and this adds to the unemployment in the labour market. This implies that a minimum wage will lead to unemployment in two ways. First of all some of the workers previously employed will lose their jobs following higher wage requirements. Secondly, some workers who did not find it worthwhile to work at lower competitive wages will find it worthwhile at new higher wages , and this increases the number of the unemployed. Unemployment rate can be derived from (Es – Ed)/Es. Therefore, minimum wage has a negative implication of increasing the unemployment rate in the labour market.
On the other hand, imposition of minimum wages in the labour market is necessary to avoid worker exploitation by the firms. Minimum wages ensure workers are renumerated higher than they were initially being paid.This is especially important policy in monopolistic labour markets to ensure workers are not unfairly used. Minimum wages also helps in motivating education sector as the price for labour becomes more favourable. A minimum wage in a monopsonistic market as it ensures that the monopsonist firm will employ the same number of workers as a competitive market. A well designed minimum wage can therefore lead to complete elimination of the monopsonistic power thus preventing exploitation of workers in the labour markets. So the government can do better by setting a minimum wage W⃰ at a competitive level.
A Case for Monopsony
Wages MCE
A S
WA
W
Wm VMPE
Em E Employment
If we consider a monopsonistic market structure imposition of minimum wage will have effect of increasing both wages and employment. Initially, a non-discrimination monopsonist is at point A where employment level is Em and Wage rates are Wm. If the government imposes a minimum wage of W, the firm will employ E workers at the wage rate. These workers will be willing to work for a wage at or below the minimum wage. This is because the marginal cost of labour is equal to minimum wage as long as the firm hires up to E workers
If the firm wants to hire beyond E the marginal, cost of hiring shifts the firm back to its level as the firm must now pay more than the minimum wage to all its workers. The new marginal cost becomes the elbow connector curve given by the area WMCE on the graph. The slope is perfectly elastic up to E and then rises further beyond E. A profit-maximizing firm will aim at equating marginal cost of hiring with the value of marginal product of employment. This increases both employment from Em to E and wage rates from Wm to W.
Argument against minimum wage
Imposition of a minimum wage will raise the marginal cost of hiring labour therefore firms will reduce their workforce as they cannot afford to employ more people, minimize their working hours and this will lead to an increase in unemployment (Sanjiv 406). This will especially be more hurtful to small firms, and it may even exclude the small competitors out of the labour market. Minimum wages will also lead to cost push inflation since businesses will seek to compensate the decreased profits with an increase in price of goods, and on the other hand, other workers will start demanding higher wages. Firms will seek to employ workers who are older and experienced as their marginal productivity is a bit higher than that of low skilled young labourers.
Minimum wages have a negative effect on the firm’s profits, as it will increase the total cost therefore minimizing the firm’s profit. Firms investments on employee training will also fall due to fall in profit levels. Minimum wage does not consider differences that exist in the cost of living in different regions and this will lead to a distortionary effect. Firms will prefer to outsource leading to loss of domestic manufacturing job as firms invest in other countries.
Argument for minimum wage
Minimum wages are beneficial since they increase investment in human capital since firms are encouraged to raise productivity of employees if they have to pay the required minimum wage. Increase in wages will motivate and encourage employees to work hard making them more efficient. It will also reduce workers absenteeism and labour turnover, which reduces costs on employers. Minimum wages are also a good policy to ensure fair distribution of income across the population since low pay leads to poverty and with increased earnings; the standards of living will improve.
Employees in low paying jobs can hardly meet their bill and this will lead to rise in crime and social injustices. Since minimum wages increases employees pay, this will also imply that the tax revenues will increase after a minimum wage is imposed. Increased earnings imply people will pay more income tax. This also implies that the government does not need to offer income support as those working have increased gross earnings and this reduces the budget consequence on the government. It will decrease the government social welfare program spending. Minimum wages stimulates consumption as workers earn more and end up spending more. This will also increase competitiveness of domestic firms as employers demand more returns from higher cost of hiring the workforce.
Conclusion
The analysis has shown that the imposition of the minimum wage has the effect of bringing changes to the level of equilibrium in the labour market. Arguments for the imposition of minimum wage have several advantages that include encouraging and making workers committed to their jobs, encourage equitable distribution of income, and helping in minimizing government spending on welfare because workers can stand on their own. It also helps in avoiding worker exploitation by the firms and enabling workers to receive higher remuneration than they were initially being paid. On the other hand, opponents of minimum wage argue that minimum wage brings negative effects that include increased marginal costs, encourages cost-push inflation, and reduction the firm’s profits due to increased costs.
Work Cited
König, Marion and Möller, Joachim. Impacts of minimum wages: a microdata
analysis for the German construction sector", International Journal of Manpower,
30.7 (2009): 716 – 741
Sanjiv, Sachdev. Raising the rate: An evaluation of the uprating mechanism for the
minimum wage", Employee Relations, 25.4(2003): 405 - 415
