• 20Feb

    Pros and Cons of Minimum Wage

    In many countries, the governments set minimum wages. The minimum wage rate set by a government in a country is the hourly rate of wage below which no worker in the country can be paid.

    Any body found in breach of the regulation is subject to legal action. Apparently, it would appear that setting a legal minimum wage rate should provide visible benefits to workers, by protecting them from exploitation and ensuring a bare minimum amount that they can earn every week.

    Is that really the case? What are the advantages and disadvantages of minimum wages?


     

    Benefits of minimum wage

    One obvious benefit of minimum wage is the protection of vulnerable workers from systematic abuse by employers. With a minimum wage, workers can rest assured that their hourly income will never dip below a certain amount.

    Moreover, as minimum wage earners usually belong to the low-skilled category of workers, the employees enjoy a certain degree of job security in the presence of a minimum wage.

    In addition to that, the same segment of society that benefits from minimum wage can also contribute by increasing national consumption through their spending, and contribute further to improving economic welfare.

    In some cases, with the implementation of minimum wage laws, the threat of strikes or collective bargaining is minimized and labour disputes settled much more amicably given the simple administrative tasks involved in determining and handing out pay to workers. It is also argued that implementation of minimum wage laws provide incentives for workers to work harder, and devote more of their time to the job.

    Disadvantages of Minimum Wages

    Although it may not appear obvious at first, the disadvantages of minimum wages are numerous and probably outnumber the advantages. Firstly, the implementation of minimum wage laws often raises the market-clearing wage level. That means, workers demand and obtain higher wages than they could have obtained if there were no minimum wage laws.

    Imposition of minimum wages often reduces the profit margins of businesses as well, and many workers who would have been employed at below minimum wage rates, now find themselves unable to secure any job in the market.

    Talking strictly from the perspective of an Economist, the imposition of minimum wage laws also distorts the market for labour, and reduces social welfare. In simpler terms, this means that many workers who could have obtained jobs at lower pay rates can not find any work for themselves. At the same time, the total sum of collective benefits to workers and employers in the market diminishes once minimum wage laws are imposed. To prove this result, one has to take a brief excursion into Economic Theory, which is not the major purpose of this article.

    Imposition of minimum wages often reduces the profit margins of businesses as well, and many workers who would have been employed at below minimum wage rates, now find themselves unable to secure any job in the market.

    Imposition of minimum wages often reduces the profit margins of businesses as well, and many workers who would have been employed at below minimum wage rates, now find themselves unable to secure any job in the market.

    Furthermore, for companies in more prosperous or advanced countries, the imposition of minimum wages often results in outsourcing of these jobs to countries with lower wage rates. This results in flight of capital from and lost opportunities for wage earnings in the original country.

    In some other cases, relatively low-paying jobs offer the only avenues for jobs for many relatively less skilled workers. Imposing a minimum wage rate resultantly constrains the earnings opportunities for such workers, who could have found sufficient incentives and motivation to continue with a respectable offer had they not been shut out of the market with the minimum wage law.

    The Final Verdict

    Given all the pros and cons of the imposition of a minimum wage, is it beneficial or harmful to institute minimum wages in a country?

    This is a tricky question, and its answer is subject to the respondent’s own personal inclinations. It is true that certain rights of workers can be ensured through the imposition of minimum wage laws, and that such workers can be motivated by the prospect of never receiving below a certain amount every week.

    Yet, it is also true that minimum wages distort the market, reduce the number of workers providing their services and reduce total social welfare as well as businesses’ profits. Many low-earning individuals who have few marketable skills could also fall victim to this scheme, if not carefully implemented. That’s because such workers might find themselves shut out of the market place because there may not exist enough demand for workers with their set of skills for such wage rates as mandated by law.

    The prospect of outsourcing jobs to foreign locations is also very real, and this is something the workers in a given country will hardly be pleased with.

    As with most economic issues, there are both pros and cons involved with minimum wages. There is no definite answer to the question of whether it is better or worse for a country.

     

     

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