Follow-up of  minimum wage hike gives disparate response

                According to the article, ‘Do US workers deserve minimum wage hike?’ published on September 29,2012 , there has been a rise of unemployment rate as minimum wages is increased. A minimum wage is a price floor that is applied to a labour market. Basically, at the equilibrium level, the quantity of labour supplied matches the quantity of labour demanded in the market. However, in this case, wages are not distributed according to the equilibrium price. Minimum wage is a type of government  intervention. When there is a government  intervention, there is a market failure. This means that market fail to deliver desirable economic or social outcome. Minimum wage occur when the wage rates are too low and couldn’t keep up with the rising prices of goods in the market. Therefore, labour union will turn to government  and demand for a higher wages. Labour union is an organisation that seek to represent labour in their place of work. The graph below shows the effect of minimum wage in the market :

                                                  

                                                                                               

                            At the equilibrium wage, the quantity of labour employed is L₀ with a wage rate of W_0. If a strong labour union can push the wage rate up to W₁, which is above the equilibrium, the numbers of labour that is offered a job by the employee is decreasing. It can be determined by the difference between L₂ and L_0. On the other hand, at this wage rate, the number of workers who are willing and able to work is L_1. As a result, there is a surplus between the demand of labour and the supply of labour. The surplus of labour will result in unemployment as mentioned earlier. There are a lot of negative effects from unemployment towards the government, economy and business. As for government, there will be a decrease in tax revenue. Since there are lesser people working, the amount of income tax collected by the government will also reduce. People who are unemployed will also tend to reduce spending. Consequently, the amount of tax on consumer spending will also reduce. There will be lesser demand for goods and services in the market. The standard of living of the person who is unemployed will also reduce. Furthermore, the external cost of unemployment includes increase in crime rates. This occur because people are desperate to get a source of income. Besides that, more young workers will tend to find work elsewhere as in overseas. This will eventually reduce the amount of national income. Minimum wage is a very serious and delicate issue to the employees as well as employers who react simultaneously to this issue. Employee will not hire young workers at the current minimum wage because they will have to pay a higher salary than before (equilibrium wage rate). So in the short term where everything is fixed, the employee will keep on employing a few workers. In the long run, everything could be varied and the minimum wages could be diminished and employee will start to employ more workers.

                            In this case, the wage floor will lead to an inefficient output. This is because, in the labour market, the quantity of worker employed is less than the efficient quantity which is the L₀ if we look at the graph above. The supply of labour marks the marginal social cost of labour to workers. Marginal social cost means the additional cost occur when  another worker is employed. Demand on the other hand measures the marginal social benefit from labour. Marginal social benefit is the additional benefit  gained when another worker is employed. The minimum wages also result in increase amount of people seeking for jobs. As the marginal social benefit outreach the marginal social benefit, there will be a deadweight loss. Deadweight loss is the loss of economic welfare due to the fact that potentially desirable production and consumption does not take place. Deadweight loss also does not have to do with the consumer surplus or producer surplus. The graph below shows how deadweight loss arise in the market. The grey area correspond to the deadweight loss. It gives the measure of the amount of deadweight loss due to the imposition of minimum wages.

                            However, minimum wages is unfair to the society. This is because only the people who are employed enjoy the benefit of the minimum wage. Those who are unemployed will have to suffer even more compared to when minimum wages was not introduced. Whether there should be a minimum wage is controversial and to top it of, the amount of state benefits being paid to low-income earners would be reduced with the introduction of a minimum wage. As a conclusion, there are pro and cons of the introduction of minimum wages as it gives benefit to one part of society who were employed or already be employed before the minimum wages was introduced  but it will also give a negative feedback to the other part of societies who are unemployed.  It is clear that those who had previously been paid below that rate will be receiving a higher salary compliance to the minimum wages. Certain countries such as Unites States of America (US)  produce a highly educated labour capital , however they were not given enough opportunities to grab because most of the firm concentrates on maximising profit by hiring low cost labour which is totally opposite from the law of minimum wages in order to minimise their cost. It is not the matter of graduates nowadays are being picky on finding a job. Unemployed young workers will not have the chance to gain experience and to be in line with those who have higher salary in the future. The effect of minimum wages on any set of workers will depend on the elasticities of substitution across different types of workers and the cross elasticity of demand across different type of goods.

By Siti Nurdiana binti Kamalul Arifin