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Effects of Minimum Wage and Why Wage Differential Does Not Persist

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Effects of Minimum Wage and Why Wage Differential Does Not Persist
KENYATTA UNIVERSITY

SCHOOL OF ECONOMICS

DEPARTMENT OF APPLIED ECONOMICS

EAE 304: LABOUR ECONOMICS

LECTURER: DR. MAINGI

ASSIGNMENT 1

Name: ABEL KAY Reg. No.: K16S/13099/2010 1. Discussing arguments in favour and against minimising wage.
Just like any other commodity market, the labour market consists of the interaction of the demand side (employers/job creators) and the supply side (employees/job seekers). The interaction settles at a market wage rate that both sides of the labour market agree to work with i.e. the equilibrium wage. There are times that the government or an intervening regulatory party assess that the agreed upon wage rate is too low for workers to earn and sets up a regulation/law to quote the market wage rate to be above the agreed upon market equilibrium wage rate that all market players must abide to. This increase in wage rate is known as minimum wage rate.
In a perfect competitive market, the equilibrium wage (W*) attracts equilibrium quantity of workers (L*). An imposition of minimum wages will increase the market wage from W* to Wmin. This increase in market wages will attract more quantity of labour (LS) but will also reduce the labour demand to (LD). There will now exist an unemployed labour force of (LS LD) consisting of a layoff (L*LD) and a surplus in job seekers (L*LS).
ARGUMENTS FOR;
The basis of minimum wage is that it improves the standard of living of workers who were earning low wages set by market forces. This is one of the advantages of minimum wage.The increase of the workers’ real wages increases their disposable income improving their economical/financial capability. Minimum wage regulation is also good for labourers that are unable to form labour unions or confront their employers for an increase in their wages due to the nature and competitiveness of their jobs. It also helps those employers that would wish to increase their employees’ salary but are unable because it will make their


References: Koster, M. H., Jan 1, 1996. The Effects of the Minimum Wage on Employment. Washington, D.C.: American Enterprise Institute. Smith, S. W., Mar 6, 2003. Labour Economics. London: Routledge. Waltman, J. L., 2000. The Politics of the Minimum Wage. 1st Edition ed. Chicago: University of Illinois Press.
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