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Setting a minimum wage rate in an economy is a topic that has sparked many debates about its implications. It is a policy that calls for the establishment of a minimum wage that all employers must adhere to. However, in an economy or a part of an economy, there are those who help and those who condemn such a change (Belman and Wolfson 6). Both groups mention potential difficulties and negative consequences for either side. Those who support the creation of a minimum wage rate state that it is a way of paying reasonable salaries that would lead to an increase in the level spending in an economy. The proponents say that leaving every employer to decide on what to pay its staff has seen the purchasing power of many households remain relatively low (Belman and Wolfson 196). Therefore, the absence of a minimum wage limits the rate of economic activities. Moreover, it is a way of reducing poverty in a country because the low-earners will have their pay rise. From there, such people might save and start up small businesses that play a part in eradicating poverty. The fact that the companies that currently pay the relatively low amount of money to their employees will increase the rate is also a way to reduce governments spending on welfare (Wilson n.p). At least most people will afford the basic needs such as payment of healthcare expenses that has seen various states set aside huge amounts of money.
Additionally, the creation of a minimum wage is also a way of reducing income inequality in an economy. For instance, the government that decides to do so will put into considerations the current rates that the low-income earners get and what would be a reasonable pay to such people (Wilson n.p). The policy makers will then likely set a minimum that is more that what other employers offer, thereby, ensuring that there is a significant reduction in the gap between the low-earners and the high-earners.
Arguments against Minimum Wage
The opponents of minimum wage issue claim that the policy might lead to the decline in the rate of employment. This group attests that some employers might find it difficult to pay at the required rate and still make profits (Wilson n.p). In such a case, they might end up employing only a few employees. Moreover, the potential investors might get discouraged whenever they project a nonfinancial viability that results from having a set minimum pay to the workers. Having a minimum payment might further lead to cost-push inflation (Belman and Wolfson 371). Most employees will have their capacity to consume enhanced given the increase of salaries or wages to a certain level. Therefore, the workers will start to demand more goods in the market, thereby, forcing the prices to move upwards.
The creation of a minimum wage might further lead to inequality in economic growth in different regions within a nation. For instance, businesses in the rural areas may find it hard to cope with the minimum wage requirements given the impact on profits. Most of the firms that operate in such areas make relatively low profits given the inability to sell in large quantities (Wilson n.p). Apparently, some might end up closing if the operation costs increase beyond their capacity to finance.
Graphical Presentation of Effect of Minimum Wage on the Labour Market
From the graph above, DD represents the demand curve while SS is the supply curve. The point at which they intersect determines the competitive wage (Wc) and the rate of employment (Ec). The graph is at equilibrium at the meeting point between Wc and Ec. With the intervention by the government to setting a minimum wage to point Em, the rate of employment will reduce to Em. A further effect is the excess supply of labor in the market. The surplus labour is as a result of the people who have been forced out of employment (the distance A-B) a the ones who have been attracted to the labour market given the increase in the minimum wage (distance B-C) (Wilson n.p). Therefore, the setting of a minimum has the effect of reducing the rate of employment and increasing the supply of labour in the market.
Overall, the idea to set a minimum wage is met by both supporting and opposing opinions. The proponents note that it is a way to increase spending by households as well as reducing poverty. Also, it enables the government to minimize its expenditures on welfare and to reduce wealth inequality and the earning gap between high-income earners and low-income earners. On the other hand, those opposed to the setting of minimum wage claim that it might see some organizations struggle to make profits because of the likely increase in the labour expenses. Moreover, the same may lead to cost-push inflation because of the possible increase in the consumers propensity to consume and also leading to inequality in economic growth in different regions within an economy. From the perspective of the labour market, the setting of a minimum wage has the effect of reducing the rate of employment and increasing the supply of labour in the market.
Belman, Dale, and Paul J. Wolfson. What Does the Minimum Wage Do? 2014. Print.
Wilson, Mark. The negative effects of minimum wage laws. Cato Institute September 1, 2012,
https://www.downsizinggovernment.org/labor/negative-effects-minimum-wage-laws. Accessed 31 January 2017.
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