Economics

Minimum wage law refers to a wage that is legally set and prohibits employers from paying employees below the specified amount of money. The policy was established to curb those employers who were at first suspected of paying their employers unjustifiable salaries, especially in developed countries such as the USA and UK. Minimum wage law focused on eliminating poverty by ensuring that employees are paid the minimum amount of wage above the poverty level index. However, instead of minimum wage laws garnering support, they have been embraced criticism from economy theorists. Economists argue that establishment andor increasing minimum wage rates encourage employers to rely more on automation, employ fewer workers, and retrench some so as to reduce costs of labor. Hence, a significant number of unskilled workers remain jobless compared to when if the wage rates were lower or determined by market forces. These laws have over the time been used for political gains by various governments.

Krugman, Paul, and Robin (2008) in their work found out that employment may fall significantly due to an increase in wage rate and reduction per capita income. In addition, a tendency results whereby employees shift jobs from secured sectors into unsecured sectors of economy and this leads to a limitation that employees are not legitimized to work in sectors offering wages below the specified one. Economists argue that the labor market should be naturally controlled by forces of supply and demand for labor. Establishment of price floor for labor causes unemployment because employees will be influenced to work at higher wage rates. At these higher wage rates, that most employers consider unjustified, only a few job opportunities will be available. The available vacancies will mostly be for the highly skilled and experienced laborers. As a result, a big number of unskilled and inexperienced laborers are put off the labor market because they lack significance. Gwartney et al. (2008) in their work found out that when the wage rates of semi-un- skilled workers are increased above an equilibrium wage, the number of those employed fall significantly. However, the effects of price floors are not exclusively negative because some employees enjoy higher wage rates upon enactment of such policies but it is the proportion of workers which is laid out of workforce that is of major concern to economists.

The following diagrammatic representation of labor market further explains the above. Vertical and horizontal axes represent wages and quantity of labor respectively.
Fig 1. Labor market reform and productivity
     
Note. From Brooke news.com by Gerald Jackson, 2005
The shaded part represents negative employment of labor i.e. unemployment with an increase of wage from equilibrium (We) to a specific price floor (Wu).

Establishment of minimum wage laws has got its pros and cons as earlier mentioned. Those who support minimum wage laws argue that it improves the living standards of the low income earners by legitimately bargaining for their salary increase. However, this is not successful if only one member of the family is employed as stated in the minimum wage history report by the U.S. Department of labor statistics (quoted by Gwartney et al.2008). Secondly, there are claims that there is a correlation between the growth of companies annual payrolls and rate of employment when minimum wage rates are established. Thirdly, its proponents claim that only a few administration logistics are required to enforce this policy because employees are always at liberty to ensure they are paid legal wages. Fourth, it is argued that minimum wage laws motivate employees to increase their output. They do not risk taking chances because of large available source of labor and therefore the employer realizes better end results. Lastly, authorities establishing minimum wage laws argue that if minimum wage rates are not established, businesses andor are likely to abuse the rights of laborers, for instance at times of inflation (Krugman et al. 2008).

Besides the above claims for establishment of minimum wage laws, the following are arguments against minimum wage laws. First, economists argue that wage laws drive competition out of the labor markets. This has got impact on creating inefficiencies and discouraging small and medium scale from venturing into the market and thus results in increased rates of employment. Secondly, as demonstrated diagrammatically in the above figure, wage laws lead to reduced number of workers employed through a reduction in the number of job opportunities andor number of hours one is employed. Thirdly, minimum wage laws lead to an artificial inflation because companies tend to cover the added costs by increasing the price of goods. Fourth, wage laws are considered to benefit some individuals (mostly the skilled and already the employed) rather than reducing poverty. Fifth, economists argue that the employers develop a culture not to train individuals further so as to keep maintain minimal expenses. In addition, such policies may influence people, especially the youth, to venture into job market before attaining quality education andor training.

Economists argue that the above factors, amongst others, negatively affect the supply and demand elasticity of labor markets when compared to purely competitive markets. In summary, the wage laws have got adverse effects on employment, price of goods, revenue generated by businesses, and income wage earnings among the semi-skilled workers. For instance, in their study Gwartney et al (2008) found out that an increase of minimum wage by 10 led to a decrease of employment amongst the youth by about 1-3 . In general, the effects of minimum wage laws among different demographic groups have been studied. For instance, Neumark and Wascher (quoted by Gwartney et al, 2008) state
The effect of minimum wages is even stronger for minority youths. If these youths had a job before the minimum wage rose, they faced a 4-6 point higher of becoming idle. A higher minimum wage increases the probabilitythat they are more likely to leave school only to find themselves without employment.