Microeconomics: Minimum Wage Will Cause Unemployment and Inflation

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ECO 162
Microeconomics
Title : Minimum wage will cause unemployment, inflation, say employers, economists Group: JBM1123u
Group Members: Muhammad Asyraff bin Ab Hamid
2010357469
: Mohamad Lukman bin Abd. Manaf 2010114997
: Muhammad Faiz bin Mustafa 2010504183
Lecturer: Miss Diana binti Mazan

Executive Summary
Minimum wage policy will lead to surging unemployment, “black market” labour and inflationary pressure, employers and economists have warned. Datuk Seri Najib Razak announced on Monday a base wage of RM900 for the peninsula and RM800 in Sabah and Sarawak with a grace period of six months, or doubles that for micro-enterprises. “When employers refuse to hire at the minimum wage, desperate workers will look to the black market and agree to take less than that,” said Wan Saiful Wan Jan, chief executive of libertarian think-tank Institute for Democracy and Economic Affairs. The government began working on a minimum wage policy last year after over a decade of pressure from labour unions during which productivity rose by 6.7 per cent annually but real wages inched up by just 2.6 per cent each year. Malaysian Employers Federation executive director Shamsuddin Bardan also said that in some cases, such as plantation workers in Sabah, a minimum wage of RM800 would double salaries. “On top of that, if Najib wins elections as expected, subsidy cuts will resume. In the end there will be very little positive impact for workers,” said Hafiz Noor Shams, an economist at a leading investment bank. Shamsuddin suggested instead that instead of “using the force of law,” the government should incentivize both employers and employees to upgrade the skill base of the workforce. The Human Resources Ministry says three-quarters of the 12 million-strong workers are unskilled. When there are un skilled workers, there are hard to give them a high salaries. This is because. It take time to make them skills. Wan Saiful said the Human Resources Ministry had already identified price control and subsidies as the main causes of depressed wage growth compared to productivity gains. “Most employers base salary increments on the rate of inflation so they can keep workers satisfied while reaping the benefits. But instead of removing this distortion, they add another layer of intervention. The thinking here is convoluted. The Barisan Nasional (BN) administration has already spent over RM6 billion to raise civil service salaries by up to 13 per cent this year as it prepares to face an election that may be called by next month. Najib’s announcement on Monday follows the increase of minimum wage by around 40 per cent in Thailand last month, part of Thai Prime Minister Yingluck Shinawatra’s campaign pledge that helped propel her to win Thai elections last July. Taiwan have made the increasing of wage by 5 percent and Vietnam also will make move on to increasing floor wage for the public sector by 27 per cent in May after enacting a minimum wage increase of as much as 69 per cent in October for both private and state-owned enterprises.

Commentary and Solution

Open market operation – Buying the short term bonds
The central bank must buy the short term bonds from public or commercial in the open market to increase purchasing power of the public to encourage more spending. Increase in demand will create more job and will reduce the unemployment rate. Decrease in taxes

Through a reduction in direct and indirect taxes on household and firms, demand for goods and services will rise from a rise in consumption. Increase in demand for goods will induce more investment and thus employment will increase from an increase in investment. Increase in government spending

On the other hand, government spending will be increased to boots aggregate demand. This mean more people will be employed to meet the government’s demand for goods and services. Creation of new job opportunities...
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