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Effects of increasing minimum wages

This commentary discusses the effects of increasing minimum wages[1] in Great Britain.

Theory explains that a price control: minimum wage, is a price imposed upon a market[2] above equilibrium[3] price. Minimum wages are imposed in order to mainly support low salary [4] workers, by guaranteeing a certain level of income, as shown by figure 1.0. Since minimum price control only affects equilibriums of markets which are under the minimum wage in this case, this price control will have minimal effect on markets with high salary jobs, as shown by figure 2.0.

The article mentions how “the minimum wage has improved living standards for many workers” however, it fails to discuss the consequences of imposing such a price control. Unemployment[5] becomes greater as minimum wages are imposed. And as there is such an increase in the minimum wages, 16.8% from £5.05 to £5.35 for adults, 21.25% from £4.25 to £4.45 for ages18-21 and 10% from £3.00 to £3.30 for ages 16-17, it is probable to tempt many to work, causing an excess supply equal to the value between quantity supplied and quantity demanded as shown in figure 3.0 below. This is explained by theory which states that the supply of labour shows the inclination of the labour force to take jobs at the given wage rate while the demand for labour shows the willingness of firms to hire workers at the given rate. Therefore, the minimum wage causes an excess supply which also represents the value of unemployment, illustrated by the arrow on figure 3.0 to the value of (Qs-Qd).

According to the article, sectors such as retail, hospitality and food production are struggling to meet the demands of the minimum wage. These business sectors are those of fairly labour-intensive and low paid nature which mean that the supply of the labour would be inelastic[6]. Due to this inelastic supply of labour, and the unscrupulous employers, there is a high risk for a parallel market to appear as labourers are eager to obtain a job, perhaps even slightly under equilibrium price. As a result, the government would have to ensure that fines will be imposed on those who violate the minimum wage law ensuring that all employers are treated with equality in a safe manner that does not affect the labour market in a negative way.

Government due to the increase in minimum wage must rearrange their budget in order to finance this price scheme. Primarily tax-payer money would be used for this venture, perhaps meaning strained finances from other sectors of the economy, such as public services, lowering standards of living, and perhaps leading to market failure[7]. This could also lead to potential increases in national tax rates, suggested by the “continuing heavy annual increases” in minimum prices.

Ultimately however, the main problem of minimum pricing is that sub-optimal resource allocation exists. By not making use of all supplied labour, the economy is not reaching maximal output due to the unemployment levels, leading to inefficiency and incurring a large opportunity cost[8] of not maximising production. Therefore, even though in the short run[9] standards of living for some labourers are improved, large costs to society exist: the change in taxation, opportunity costs, potential parallel market and sub-optimal resource allocation; according to theory, these negative aspects will gradually increase in the long run[10], possibly turning this price scheme into a negative externality[11].

INSERT DIAGRAM

Therefore, government must attempt to resolve the excess supply of labour. This can be accomplished by purchasing all surplus labour which would cost ((Qs-Qd)Pmin) according to figure 3.0, or even imposing social unemployment benefits. Alternatively, demand of labour could be stimulated by excessive advertisement. These methods however incur even higher costs to society, and basically render the minimum wage away from purpose.

  1. A wage set by government above equilibrium which it is not allowed to fall below
  2. A process by which buyers and sellers interact
  3. Market clearing price
  4. Pay for labour
  5. Number of adult workers who are not employed and who are actively seeking jobs
  6. Notes
  7. When the price mechanism fails to take into account all costs and or benefits in providing for and or consuming a good
  8. The cost of the opportunity forgone
  9. The time in which one or more factors of production are fixed
  10. The time at which all factors are variable
  11. Result of marginal social benefits being less than marginal social costs


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