When governments impose prices in an attempt to help some particular group of producers or consumers, there are often unintended consequences. Use the case of Minimum Wage to show this. (a) Explain how some workers and companies may be disadvantaged through this wage increase.
The minimum wage can be described as the lowest hourly, daily or monthly HYPERLINK httpen.wikipedia.orgwikiWage o Wage monetary compensation that an employer should legally pay its workers. It was imposed by the Government to increase the standard of living of unskilled workers and also reduce poverty. Minimum wage is a form of price floor which sets the price of labour above its equilibrium price i.e. the level at which the demand for labour meets the supply of labour. The imposition of a minimum wage increases the price of labour but doesnt result in a consequent increase demand of labour.
According to the laws of economics an increase in price always has an inverse impact on the demand for a good or service .Thus when the price for labour increases the demand for labour falls. A greater number of workers are now willing to work at higher wage levels for a smaller number of jobs. Companies tend to be more selective in choosing whom they employ when the supply of labour outstrips demand. Thus for an equal wage companies will prefer to employ skilled labour in preference to unskilled labour. Therefore the workers who dont possess either sufficient skill or experience or are approaching retirement age will find themselves unemployed in this job market. Unemployment and the loss of a stable wage will in effect contribute to increasing poverty in society rather than decrease it
Minimum wage requirements have an adverse impact on Companies by reducing the profit margin of business owners who had previously benefited from cheap labour both monetarily and through economies of scale. With the imposition of the minimum wage companies now have to pay a higher proportion of their profits as wages thus eating into their profit margins and effecting overall revenues. As a result companies functioning in industries effected by the imposition of minimum wage might not find it profitable enough to work in this industry and might to decide to either stop operations altogether and move to another industry or seek alternative methods of increasing profit margins .
Businesses may also react to an increase in the price of labour by compensating for this increase by raising the prices of their product and service. If all businesses do that across the board and at every level it will lead to inflation in the economy. Inflation will raise the prices of essential food and commodities causing further problems for those workers who are also facing unemployment thus increasing poverty and social inequality even further.
(b) How could entry level wages better be established
Determining wages at a prevailing market rates using the concept of supply and demand may not bring about an equitable and fair distribution of compensation. It may also result in the exploitation of labour with a workers right to equal and fair pay being overshadowed by the companys quest to earn more profits. The minimum wage was brought in to achieve equitable wage for all and reduce poverty. But in the prior section we see how the imposition of minimum wage actually results in increasing unemployment, inflation and poverty in the economy. What then is an alternative solution to determining equitable wages
The first solution revolves around linking together the average wage and the highest wage earned in the Company. This approach stipulates the formation of a law which entails that the highest compensation that an employee obtains can be no greater than a specific percentage (for example 30) times the average wage compensation. All workers are entitled to an average wage, Thus if the average wage is eight dollars an hour than the highest wage earned cannot exceed 240 dollars an hour. If the owner wants to increase the highest wage they will automatically also increase the lowest wage.
However this model could prove a little unrealistic in its assumption that all workers will be paid an average wage regardless of their skill level. If this assumption is held true then employers will once again become selective in who to employ and the result is unemployment of those possessing a relatively low skill level.
The second option centres on the notion of implementing a reverse income tax. This concept works on the criteria that all citizens are given a certain subsidy that is say 5,000 a year to live on. As the person finds employment and begins to earn beyond 5000 dollars his subsidy becomes zero. But where he fails to earn an income of more than 5000 dollars a year his subsidy stays in place to and supplements the total income.
This option could prove unfair to those receiving a higher wage as it will result in penalizing workers with a higher set of skills that allow them to earn higher incomes.
Question 2. (a) What factors explain why some people earn very low incomes
The level of a persons income is influenced by price of the skills that they sell in the market. People with a lower level of academic knowledge as well as lower social and interaction skills generally earn lower incomes than people who have academic, social and communication skills. The majority of low wage earners are unskilled and employed in labour intensive and manual work.
The labour market pays a higher price for certain skills than others. For example even though the worker may possess basic academic skills they still get lower wages because the nature of their job is very simple and uncomplicated and can be performed by anybody, Since the substitution factor is high the employer doesnt feel the reason to increase compensation to retain the services of an employee and will not raise the compensation.
In certain cases a person might be skilled but has not updated their skills in response to an evolving industry as a result the demand for their particular skills is low and so is the price that the employer is willing to pay for these services. This is true in the case of old or retired individuals who find that their skills have lapsed in a technologically evolved environment and cannot earn a decent living using their present skills
In certain cases people may possess the required skills but the industry in which they operate in is going through a slump and as a result there is a temporary lack of opportunity to increase income. This is true in the case of workers employed in seasonal industries or dependant on the agricultural industries. For example farmers will be able to make very little money if they do not have a good harvest or if their harvest gets destroyed by a flood or a hurricane.
(b) Who controls these factors
Where the level of wages is influenced by the price of the skills in the market the worker is in a position to control the wages that they make by making a concerted effort to learn skills that pay more and are not easily replaceable. Thus an employee working in the post office stamping letters and earning a meagre wage can take a vocational training course and train to be a librarian thus earning highly marketable skills which will increase their income. Where the workers are earning a low income because their skills are outdated they can once again retrain and gain skills which are employable in the current environment. For example a retired person can learn computer skills and earn more by filling surveys on the internet than they did bagging groceries.
Where the worker earn less wages due to a slump in the current industry they should supplement their income by venturing into a related industry which has demand for their skills. If this is not possible they should leave the industry and retrain in a new career in an industry which offers high compensation for their skills.
The governments too can also influence a persons capability to earn a higher wage y providing free vocational training an incentive for low wage earners to increase their level of skills. The Government can also provide grants for certain low income groups to attend college and work towards earning a degree that can procure high income jobs in the future. Companies can also create opportunities for skill development by offering on the job training and incentives for all its workers to attend some kind of vocational training to improve their communication skills.
(c) Can government through public policy influence all the factors that result in poverty
The Government can use certain aspects of public policy to change certain factors that cause poverty. The first among this involves a Federal initiative to increase the level of education and literacy in impoverished areas. By increasing education the government is indirectly increasing the capability to workers to seek higher paid employment and sustain their families more adequately in the long run
Where poverty exists because the family is supported by a single parent the Government can provide subsidies and grants to these parents to enable them to raise heir children better and provide a better quality of life for their parents. The Government also gives single parents grants to back to college in an effort to improve their skills and earn high paying job.
One way to reduce poverty is to increase taxation and to use this additional tax income towards social welfare projects such as building more old peoples home for the retired who earn meagre incomes and cannot afford a good standard of living or providing free meals for families below the poverty line.
Another way to reduce poverty is to government incentives to create new jobs in impoverished areas. The Government can open more government institutions like schools and hospitals in these areas and train people here to be employed in these institutions thus creating gainful employment in the area.
Though the government can take initiatives to reduce poverty big businesses must also take social responsibility and help eradicate poverty by reducing greedy corporate policies that aim to exploit cheap labour and result in the rich getting richer and the poor getting poorer.