Problems with Raising the Minimum Wage

"The problems with raising the minimum wage" by Brian Gongol [http://www.gongol.com/research/economics/minimumwage/ ] describe about some issues would be created while the minimum wage is raising in labor market.

The government needs to set a minimum wage as it helps in increasing the standards of living amongst the workers, it decreases poverty and it enables businesses to be more efficient. This setting of a minimum wage by the government helps to ensure that no worker is paid below the set amount of wage.

A minimum wage is the lowest hourly, daily or monthly remuneration that employers may legally pay to workers. Equivalently, it is the lowest wage at which workers may sell their labor. Although minimum wage laws are in effect in many jurisdictions, differences of opinion exist about the benefits and drawbacks of a minimum wage. Supporters of the minimum wage say that it increases the standard of living of workers, reduces poverty, and forces businesses to be more efficient. Opponents say that if it is high enough to be effective, it increases unemployment, particularly among workers with very low productivity due to inexperience or handicap, thereby harming less skilled workers and possibly excluding some groups from the labor market; additionally it is less effective and more damaging to businesses than other methods of reducing poverty. The minimum wage set below the equilibrium wage has no effect. The reason is that wage does not constrain the market force. The force of the law and the market force are no in conflict. But a minimum wage above the equilibrium wage has powerful effects on labor market. The reason is that the minimum wage attempts to prevent the price from regulating the quantities demand and supplied. The force of the law and the market force are in conflict.

Diagram 1

As the minimum wage is increasing, more and more firms would reduce the labor demanded and fire some employees. This is because companies are not willing to pay minimum wage to employees who are low-skills or freshmen. So, companies can be more selective in those whom they employ thus the least skilled and least experienced will typically be excluded. Thus, higher minimum wage will increase the unemployment rate in labor market. (Show by diagarm.3)

Higher minimum wages are especially destructive for people with poor work skills and limited work experience. This is why young people and minorities tend to suffer. If an employer needs someone to perform odd jobs, and he values the work at $2 per hour, he will not hire a person if the minimum wage is $7 per hour, thus keeping unemployment in low-wage brackets higher than it would otherwise be. So, there is a black market wage (Show by diagram.3) in labor market. Actually, in reality life, there are some people who are unemployment is also accept lower wage to perform due to the surplus of labor.  

Minimum wages is unfair. Minimum-wage legislation prohibits wages from falling low enough to equate the number of people seeking jobs with the number of jobs being offered. As a result, the supply of unskilled labor permanently exceeds the demand for’ unskilled labor at the government-mandated minimum wage. Minimum-wage legislation thus creates a buyers’ market for unskilled labor. And as in all buyers’ markets, buyers (employers) have an unequal bargaining advantage over sellers (unskilled workers). Consider, for example, a grocer. Suppose he decides that a clean parking lot will attract more customers, and that this will increase his sales by $10 per day. Of course, the grocer will pay no more than $10 a day to have his parking lot cleaned. He then investigates how best to get this done. Suppose there are two options available to him. One way is to hire a fairly skilled worker who can clean the parking lot in one hour, while the second way is to hire two unskilled workers who, working together, will get the job done in the same time. Other things being equal, the grocer will make his decision based upon the relative cost of skilled versus unskilled labor. Let’s assume the skilled worker will charge $6 an hour, while each of the unskilled workers will charge $2.50 an hour. In a free labor market, the grocer will hire the two unskilled workers be-cause, in total, it costs him $5 per hour for the unskilled workers whereas it would cost $6 for the one skilled worker. But what will the grocer do if a minimum wage of $4 per hour is imposed? To hire the two unskilled workers will now cost him a total of $8 an hour. The skilled worker now becomes the better bargain at $6 an hour. Minimum-wage legislation strips unskilled workers of their one bargaining chip: the willingness to work at a lower wage than that charged by workers with more skills. The result is unemployment of the unskilled workers. Consider another effect of the minimum wage. Because there are more people who want jobs at the minimum wage rate than there are jobs to go around, employers have little incentive to treat unskilled workers with respect. If an employer mistreats an unskilled worker, the employer need not be concerned if the worker quits. After all, there are plenty of unemployed unskilled workers who can be hired to fill positions vacated by workers who quit. In addition, the permanent buyers’ market created by the minimum wage encourages employers to discriminate in their hiring and firing decisions on the basis of sex, race, religion, and so on. Suppose an employer has two minimum-wage jobs available, but there are ten unskilled workers who apply for the jobs. Bemuse the workers are prohibited from competing with each other on the basis of wage rates, other factors must determine which of the workers will be hired. If the employer dislikes blacks, and if there are at least two non-black workers who have applied for employment, no black workers will be hired. With a surplus of unskilled workers, there is no economic incentive to stop this bigoted employer from indulging his prejudices.

                                                                                                         by Xu Zhi Peng