Wages play a huge part to play in the productivity of the labourers and workers. It acts as a medium of incentive for the workers to increase their productivity level which in turn helps in increase in the level of output and production (Gerhart, 2017). Minimum wages also acts as a shield for the workers in an industry as below the minimum wage rate the employers can reduce their wages. It is that minimum level which the employers have to pay to the laborers and staff irrespective of any market conditions. Thus, minimum amount of wage rate plays a huge impact on the market scenario of an industry. It acts a major force in the employment of workers in an industry. It acts as an effective wage floor (International Labour organisation, 2020).
Taking into consideration the minimum wage, it will make the producers to shift the increase in the wage rise onto the consumers in the form of an increase in the prices of goods and services. This on a macroeconomic level will lead to a rise in the prices of overall goods and commodities in the economy consequently increasing the level of inflation (Jhinghan, 2016). This can be depicted by a diagram:
As shown in the diagram price and GDP are taken on the y and x axis respectively. The demand and initial supply curve are at equilibrium at point E with Q1 output and real GDP in the country with equilibrium price P. When the minimum wage level is implemented the producer shifts the overhead extra cost in the production of increased wage onto the consumers the prices rise from P to P1 level. It leads to a shift in the supply curve from right to left thereby decreasing the total supply and shifting the equilibrium level from E to E1.
In addition to this, if the minimum wage rate is higher than the equilibrium wage rate then since the employers cannot afford higher wages and salaries of its employees and workers so they tend to decrease the level of employment (Ruesga-Benito et al., 2017). This can also be depicted by a graph:
With the diagram above it is clear that wages and employment of labor both have been taken on the y-axis and x-axis respectively. The equilibrium level of wages is at EL* and employment level of labor is at WE with E as the equilibrium point. Now, since the minimum wage rate is higher than the equilibrium wage rate so the equilibrium has been shifted from E to E1. This has taken the wage level to increase and shift from W to W*. Thereby decreasing the level of employment from L* to L.
Taking into due consideration the advantages and disadvantages of the minimum wage on the firms, consumers and employees. Firstly taking into regard the advantages:
Now taking into regard the disadvantages of the minimum wage on the companies, consumers and lastly on the employees and workers working in the organisations. The limitations can be listed as:
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International Labour Organisation. 2020. Effects on Wages. [Online]. Available at: https://www.ilo.org/global/topics/wages/minimum-wages/monitoring/WCMS_438873/lang--en/index.htm [Accessed on: July 10th, 2020].
IZA World of Labor. 2018. Employment effects of minimum wages. [Online]. Available at: https://wol.iza.org/articles/employment-effects-of-minimum-wages/long [Accessed on: July 10th, 2020].
Jhighan, M.L. 2016. Micro economics theory. Vrinda Publications.
MaCurdy, T. 2015. How effective is the minimum wage at supporting the poor? The University of Chicago Press, 123(2), 497-455, DOI: 10.1086/679626
Mumford, K.J. and Lopresti, J.W. 2016. Who benefits from a minimum wage increase? Sage Journals, 69(5), 1171-1190, https://doi.org/10.1177%2F0019793916653595
Ruesga-Benito, S.M., Gonzalez-Laxe, F. and Picatoste, J. 2017. The debate on the economic effects of minimum wage legislation. European Journal of Government and Economics, 6, 171-190, DOI: 10.17979/ejge.2017.6.2.4328
Sexton, R. 2018. Exploring microeconomics. Sage Publications.
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