Minimum Wage Legislation Essay
Nowadays, the minimum wage legislation has been an increase in very many countries (Exclusivepapers, n.d.). According to Law Pay Commission (2006), a minimum wage is the lowest wage that each employee can legally get from an employer in hourly, daily or monthly basis. This is the lowest amount at which workers can sell their labour. By each country independently having their laws, there has different opinions regarding the merits and the demerits of the minimum wage legislation. This essay will illustrate and explain the possible effect of the introduction of minimum wage legislation on labour markets which involve relevant skill mixed over time with the use of diagrams. In addition, whether the minimum wage legislation has a positive or negative impact on the standard of living of people in poverty will be discussed.
Minimum wage behaves as a classical floor on labour. According to the analysis of the demand and supply curve of labour, if set above the equilibrium price, …show more content…
more labour will to be provided by workers than will be demanded by employers, creating a surplus of labour such as unemployment (Sloman and Garratt, 2010).
Diagram 1:
It is assumed that workers are willing to labour for more hours if paid a higher wage. In diagram 1, since higher wages increase the quantity supplied, the supply curve is upward sloping, showing as a line moving up and to the right. While it is assumed that the higher the wage, the fewer hours an employer will demand of an employee. Therefore, the demand of labour is shown as a line moving down and to the right.
However, the impact of the minimum wage legislation on employment is not so simple. It is linked to the labour markets which involves workers with different skill level. The classification of labour markets mainly divided into two parts. One is unskilled and semi-skilled labour which requires little specific education or experience, performing daily production tasks that do not depend on technical abilities or skills such as restaurant dishwasher and undergraduates (Investopedia, n.d.). The other is skilled and highly skilled labour which is the specialized part of labour force with advanced education such as engineers, builders and professors (Ucmerced, n.d.). For the skilled and highly skilled labour, whatever in short term or long term, their wage is always above the minimum wage and therefore minimum wage has little effect on the standard of living.
Diagram 2:
In diagram 2, the market wage is still higher than the minimum wage that the government has set. In other words, the minimum wage have nearly no influence on those who are with high skills.
While for unskilled or semi-skilled workers, in the short term, they may be demanded by firms for the inelastic labour markets. However, in the long term, the quantity of unskilled workers employed will fall for the labour market is gradually becoming more elastic. The rate of unemployment will increase.
Diagram 3:
3(1)
3(2)
In diagram 3(1), the demand and supply curve for unskilled and semi-skilled workers in short term are relatively inelastic and therefore the rate of unemployment is relatively low. While in diagram 3(2), the demand and supply curve for unskilled and semi-skilled workers in long term are becoming more elastic and the area of unemployment is larger than that in short term.
According to above has analysed, it can be concluded that the minimum wage has little effect for those who are with high skills while will cause the higher the rate of unemployment for the unskilled in the long term. Then the impact of the minimum wage on the well-being of people living in poverty will be discussed in the following paragraphs.
In terms of world poverty, minimum wages in developed countries can help Third World countries become more competitive (Anderton, 2006). Some low value, unskilled jobs will disappear in rich countries which a minimum wage is introduced. Third World countries will then be able to fill the gap left by exporting those products to the rich country.
While the minimum is likely to help world poverty, whether the minimum wage legislation has a positive or negative impact on the standard of living of people in poverty is dependent on different countries with different economic systems. In developing countries, sharp criticisms and warnings have emerged within the framework of the Poverty Reduction Strategies Papers, which coordinate all development policy. It has been argued that a minimum wage does not protect the poorest workers in the informal economy, but covers only the formal and better-off workers (Lustig, Nora Claudia; McLeod, Darryl. 1997). Although some poor people in developing countries is slightly above the poverty threshold which is the point at which one is brought to be able to achieve a minimum standard of living, it is clearly a wage that is inadequate for them to support a family (Investopedia, n.d.) since nowadays housing and health care are also becoming a large expense in a family budget other than food. Therefore, in developing countries the minimum wage is not certainly to protect the standard living of unemployed or people towards the poverty line.
While in some countries, there is evidence that the minimum wage can play an important role in reducing poverty and improving people’s standard of living. For example, In Cambodia, where the textile sector is the only industry with a minimum wage, remittances sent by women workers to the countryside were shown to benefit the poor.
Furthermore, for some middle income countries in Latin America where the minimum wage have an indirect impact on poverty such as Argentina, Brazil, Mexico and Uruguay, the minimum wage was relatively low in the 1990s and represented between 20 and 25 per cent of the average wage (Lustig, Nora Claudia; McLeod, Darryl. 1997). In these countries, almost all workers in the formal economy receive wages higher than the minimum wage, while many workers in the informal economy were receiving exactly the minimum wage and many had their wages increased each time the minimum wage was adjusted (Lustig, Nora Claudia; McLeod, Darryl. 1997).
Other studies based on cross-country comparison indicate that a higher minimum wage is associated with a lower level of poverty. In other words, the higher minimum wage, the better standard of living of people will be also including those who living in poverty. This result is merely the sign of a correlation between the two variables. For instance, the correlation could indicate that countries with a high minimum wage are also more committed to the reduction of poverty and have developed social policies targeting the poor (Saget, 2001).
It is known that different countries will issue the minimum wage policy differently according to their own country condition. However, it is believed that the minimum wage is designed to overcome poverty and to ensure the satisfaction of the needs of all workers and their families. Therefore, to fight the poverty, the minimum wage should be used with caution for every government. There are at three least conditions should be met in order for the minimum wage to have a positive effect on the standards of living of workers and their families (Saget, 2001). Firstly, most workers are entitled to receive at least the minimum wage in exchange for their work including people who are not employed (the disabled, the elderly, sick people, the unemployed). Secondly, the employers comply with the minimum wage. Compliance with the regulations means both that employers are organized and have been consulted during the minimum wage fixing process. Thirdly, there is no increase in prices following the rise in the minimum wage.
In conclusion, the effect of minimum wage legislation is linked to workers with different level of skills.
The minimum wage will not affect those with high skills while in the long term the minimum wage will influence those with low skills. In addition, whether the minimum wage can have positive or negative impact on well being of people is dependent on how the government to use the minimum wage policy according to their national conditions. It is suggested that if the minimum wage policy is designed to take more workers, employers and market price into account, the positive side of minimum wage will be expanded such as reducing poverty. However, if the minimum wage is set randomly, the minimum wage will probably expand the gap between the rich and the poor including those who are excluded by the minimum wage and cannot reach the original effect brought by minimum wage, causing the negative effects such as unemployment for those unskilled and low standard living of people living in
poverty.
Bibliography:
Anderton(2006), Economics 4th edition. London: Pearson Education. P502-505
Sloman and Garratt (2010), Essential of Economics. London: Pearson Education. P178-179
Exclusivepapers (n.d.) Minimum wage legislation [Internet].
Available from :< http://www.exclusivepapers.com/essays/Law/Minimum-wage-legislation.php>[Accessed 21 November 2012]
Ucmerced (n.d.) labour market analysis [Internet]. Available from :< http://hr.ucmerced.edu/compensation-and-classification/labor-market-analysis> [Accessed 20 November 2012]
Investopedia(n.d.) skilled labour [Internet]. Available from: [Accessed 20 November 2012]
Lustig, Nora Claudia; McLeod, Darryl. 1997. “Minimum wages and poverty in developing countries: some empirical evidence”, in Sebastian Edwards and Nora Claudia Lustig (eds.): Labour markets in Latin America: Combining social protection with market flexibility. Washington, DC, The Brookings Institution Press, pp. 62-103.
Saget, C. 2001. “Poverty reduction and decent work in developing countries: Do minimum wages help”. International Labour Review (Geneva), Vol. 140, No. 3, pp. 237-269
Minimum wage behaves as a classical floor on labour. According to the analysis of the demand and supply curve of labour, if set above the equilibrium price, …show more content…
more labour will to be provided by workers than will be demanded by employers, creating a surplus of labour such as unemployment (Sloman and Garratt, 2010).
Diagram 1:
It is assumed that workers are willing to labour for more hours if paid a higher wage. In diagram 1, since higher wages increase the quantity supplied, the supply curve is upward sloping, showing as a line moving up and to the right. While it is assumed that the higher the wage, the fewer hours an employer will demand of an employee. Therefore, the demand of labour is shown as a line moving down and to the right.
However, the impact of the minimum wage legislation on employment is not so simple. It is linked to the labour markets which involves workers with different skill level. The classification of labour markets mainly divided into two parts. One is unskilled and semi-skilled labour which requires little specific education or experience, performing daily production tasks that do not depend on technical abilities or skills such as restaurant dishwasher and undergraduates (Investopedia, n.d.). The other is skilled and highly skilled labour which is the specialized part of labour force with advanced education such as engineers, builders and professors (Ucmerced, n.d.). For the skilled and highly skilled labour, whatever in short term or long term, their wage is always above the minimum wage and therefore minimum wage has little effect on the standard of living.
Diagram 2:
In diagram 2, the market wage is still higher than the minimum wage that the government has set. In other words, the minimum wage have nearly no influence on those who are with high skills.
While for unskilled or semi-skilled workers, in the short term, they may be demanded by firms for the inelastic labour markets. However, in the long term, the quantity of unskilled workers employed will fall for the labour market is gradually becoming more elastic. The rate of unemployment will increase.
Diagram 3:
3(1)
3(2)
In diagram 3(1), the demand and supply curve for unskilled and semi-skilled workers in short term are relatively inelastic and therefore the rate of unemployment is relatively low. While in diagram 3(2), the demand and supply curve for unskilled and semi-skilled workers in long term are becoming more elastic and the area of unemployment is larger than that in short term.
According to above has analysed, it can be concluded that the minimum wage has little effect for those who are with high skills while will cause the higher the rate of unemployment for the unskilled in the long term. Then the impact of the minimum wage on the well-being of people living in poverty will be discussed in the following paragraphs.
In terms of world poverty, minimum wages in developed countries can help Third World countries become more competitive (Anderton, 2006). Some low value, unskilled jobs will disappear in rich countries which a minimum wage is introduced. Third World countries will then be able to fill the gap left by exporting those products to the rich country.
While the minimum is likely to help world poverty, whether the minimum wage legislation has a positive or negative impact on the standard of living of people in poverty is dependent on different countries with different economic systems. In developing countries, sharp criticisms and warnings have emerged within the framework of the Poverty Reduction Strategies Papers, which coordinate all development policy. It has been argued that a minimum wage does not protect the poorest workers in the informal economy, but covers only the formal and better-off workers (Lustig, Nora Claudia; McLeod, Darryl. 1997). Although some poor people in developing countries is slightly above the poverty threshold which is the point at which one is brought to be able to achieve a minimum standard of living, it is clearly a wage that is inadequate for them to support a family (Investopedia, n.d.) since nowadays housing and health care are also becoming a large expense in a family budget other than food. Therefore, in developing countries the minimum wage is not certainly to protect the standard living of unemployed or people towards the poverty line.
While in some countries, there is evidence that the minimum wage can play an important role in reducing poverty and improving people’s standard of living. For example, In Cambodia, where the textile sector is the only industry with a minimum wage, remittances sent by women workers to the countryside were shown to benefit the poor.
Furthermore, for some middle income countries in Latin America where the minimum wage have an indirect impact on poverty such as Argentina, Brazil, Mexico and Uruguay, the minimum wage was relatively low in the 1990s and represented between 20 and 25 per cent of the average wage (Lustig, Nora Claudia; McLeod, Darryl. 1997). In these countries, almost all workers in the formal economy receive wages higher than the minimum wage, while many workers in the informal economy were receiving exactly the minimum wage and many had their wages increased each time the minimum wage was adjusted (Lustig, Nora Claudia; McLeod, Darryl. 1997).
Other studies based on cross-country comparison indicate that a higher minimum wage is associated with a lower level of poverty. In other words, the higher minimum wage, the better standard of living of people will be also including those who living in poverty. This result is merely the sign of a correlation between the two variables. For instance, the correlation could indicate that countries with a high minimum wage are also more committed to the reduction of poverty and have developed social policies targeting the poor (Saget, 2001).
It is known that different countries will issue the minimum wage policy differently according to their own country condition. However, it is believed that the minimum wage is designed to overcome poverty and to ensure the satisfaction of the needs of all workers and their families. Therefore, to fight the poverty, the minimum wage should be used with caution for every government. There are at three least conditions should be met in order for the minimum wage to have a positive effect on the standards of living of workers and their families (Saget, 2001). Firstly, most workers are entitled to receive at least the minimum wage in exchange for their work including people who are not employed (the disabled, the elderly, sick people, the unemployed). Secondly, the employers comply with the minimum wage. Compliance with the regulations means both that employers are organized and have been consulted during the minimum wage fixing process. Thirdly, there is no increase in prices following the rise in the minimum wage.
In conclusion, the effect of minimum wage legislation is linked to workers with different level of skills.
The minimum wage will not affect those with high skills while in the long term the minimum wage will influence those with low skills. In addition, whether the minimum wage can have positive or negative impact on well being of people is dependent on how the government to use the minimum wage policy according to their national conditions. It is suggested that if the minimum wage policy is designed to take more workers, employers and market price into account, the positive side of minimum wage will be expanded such as reducing poverty. However, if the minimum wage is set randomly, the minimum wage will probably expand the gap between the rich and the poor including those who are excluded by the minimum wage and cannot reach the original effect brought by minimum wage, causing the negative effects such as unemployment for those unskilled and low standard living of people living in
poverty.
Bibliography:
Anderton(2006), Economics 4th edition. London: Pearson Education. P502-505
Sloman and Garratt (2010), Essential of Economics. London: Pearson Education. P178-179
Exclusivepapers (n.d.) Minimum wage legislation [Internet].
Available from :< http://www.exclusivepapers.com/essays/Law/Minimum-wage-legislation.php>[Accessed 21 November 2012]
Ucmerced (n.d.) labour market analysis [Internet]. Available from :< http://hr.ucmerced.edu/compensation-and-classification/labor-market-analysis> [Accessed 20 November 2012]
Investopedia(n.d.) skilled labour [Internet]. Available from: [Accessed 20 November 2012]
Lustig, Nora Claudia; McLeod, Darryl. 1997. “Minimum wages and poverty in developing countries: some empirical evidence”, in Sebastian Edwards and Nora Claudia Lustig (eds.): Labour markets in Latin America: Combining social protection with market flexibility. Washington, DC, The Brookings Institution Press, pp. 62-103.
Saget, C. 2001. “Poverty reduction and decent work in developing countries: Do minimum wages help”. International Labour Review (Geneva), Vol. 140, No. 3, pp. 237-269