Introduction
Minimum wage is a price floor which is applied to the labour market which makes it illegal to trade at a price lower that the specified level which the rate is set at. It is applied in the United Kingdom and most countries of the world.
Information
In January 2010, 20 of the European Union's 27 Member States (Belgium, Bulgaria, the Czech Republic, Estonia, Ireland, Greece, Spain, France, Latvia, Lithuania, Luxembourg, Hungary, Malta, the Netherlands, Poland, Portugal, Romania, Slovenia, Slovakia, and the United Kingdom) and two candidate countries (Croatia, Turkey) had national legislation setting a minimum wage by statute or by national agreement.
The current minimum wage rates in the United Kingdom were reviewed in October this year. As a result of this the National Minimum Wage rates increased from:
£5.80 to £5.93 an hour for workers aged 21 and over
£4.83 to £4.92 an hour for workers aged 18 to 20
£3.57 to £3.64 an hour for workers aged 16 to 17
The minimum wage law tries to change the wage rate. The effects of a minimum wage would be dependent upon whether or not the minimum wage is binding or non-binding.
Non binding minimum wage
A minimum wage is not binding if it is set below the equilibrium wage rate. In this case, no one wants to pay or work for a wage that is below the minimum. This would also mean that the forces of the law and the market forces would not be in conflict.
Binding minimum wage
A minimum wage is binding if it is set above the equilibrium wage. In such a case minimum wage law and market forces are in conflict. With a binding minimum wage, wage adjustments would be blocked and the market is prevented from allocating labour resources.
Effects of minimum wage
Minimum wage can result in unemployment which could be defined as being a waste of resources. In a competitive labour market a minimum wage that exceeds the equilibrium wage decreases unemployment. However, this outcome does not occur in all types of labour market, for example, a monopsony. In a monopsony labour market, a minimum wage could result in an increase in both employment and wage rate.
The diagram below illustrates binding minimum wage.
From the diagram it is shown that the minimum wage is above the equilibrium wage rate and is binding. The grey shaded area of the diagram shows that the illegal rate of wage which would be anything fewer than 6 Euros per hour. The distance between point A and point B also shows unemployment rate is 2 million hours per year.
Employment/ Unemployment
The following diagram shows the current level of employment and unemployment rate in the UK
The employment rate for those aged from 16 to 64 for the three months to August 2010 was 70.7 per cent. The number of people in employment aged 16 and over increased by 178,000 to reach 29.16 million. Employment is up 241,000 this year, however it is 270,000 lower than the previous two years. Minimum wage would have a massive effect on the unemployment rates.
The following diagram shows why minimum wage is inefficient.
A minimum wage rate would shrink a firm’s surplus, shown in blue, as well as a workers surplus, illustrated in green, resulting in the creation of a deadweight loss, which is shown in grey.
A deadweight loss is created when the quantity of labour employed, the value of the firm of the marginal worker exceeds that wage rate for which that person is willing to work. Where total loss exceeds the deadweight loss at the equilibrium level of employment, unemployed people have a greater incentive to spend time and effort looking for new work.
Minimum wage could be seen as being unfair on two levels, as it delivers an unfair result and also it imposes unfair rules. The result is unfair because only those people in employment will be of benefit to the minimum wage, and as a result of this the unemployed worse off than with no minimum wage.
Those who are employed are most likely not those who are least well off. When the wage rate doesn’t allocate jobs, discrimination will increase meaning there in another level of unfairness.
Conclusions
The overall effects of a binding minimum wage in a competitive labour market are:
Although minimum wage can be classified as being inefficient, it will not be a disadvantage to everyone. People who have jobs at the minimum wage rate would be better off than those people who are unemployed
In my own personal opinion minimum wage is a good idea because it means people:
Will get a fair wage
Can mean less discrimination or favouritism of employees
Everyone treated equally
However, minimum wage could lead to complications in the economic environment because if minimum wage increases it can lead to price rates of products, therefore leading to a higher cost of living.
The interpretation of minimum wage can be softened by the fact that:
Minimum wage can be seen as being good or bad depending upon your own personal view or job status. For example, employers want minimum wage rate to be as low as possible in order to keep costs down whereas, employees want minimum wage rate to be higher so that they would have more disposable income.
In countries where there is no minimum wage people can be discriminated against and have to work for an unacceptably low level of pay which may lead to very a poor lifestyle.
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