Insert your surname 3 Name: Instructor: Institution: Date: Price Theory Minimum wage is said to be the lowest compensation for labour offered by a worker. It may be on hourly, daily or monthly basis. In most countries the government is responsible for setting the minimum wage in various sectors of the economy. Various trade unions and other employees’ welfare groups have also engaged employers in talks aimed at increasing the minimum wage. They use collective bargaining agreements in their engagements which are legally binding to the parties. These unions seek to stop employees’ exploitation by ensuring the employee’s output matches with their pay. Labour costs determine the number of people a firm and an industry can employ. Increased costs of labour lower the employment rate thus leading to increased unemployment level. Unemployment is a state in the economy where those who are willing and able to offer services but are unable to get jobs. There are various forms of unemployment that exists in a given economy. There has been a wide spread debate on the effect of the minimum wage on employment with argument being put forward for and against. This paper seeks to explain the various arguments that have been put forward about minimum wage with further explanation of the effects that the minimum wage has on the level of employment in a given economy. The global work force has faced stagnating wages over a long period of time irrespective of the prevailing economic status and the performance of the firms in which they are working. Economists have for a long period been at the forefront in opposing minimum wage setting. The wage floor provides the minimum point at which the salaries of labourers should not go below. The economic theory of minimum wages seeks to explain the effects in monetary terms arising from government and social policies on the economy. Each country has its economic principles that guide it in building its economy. Minimum wage is an important aspect of the government policy on its citizens. It seeks to ensure that all employees in the private and public sector earn a decent pay as well as lead a quality life, thereby having a living standard that is above the poverty line. Various economic changes such as inflation necessitate the government to set the minimum wages. Employers tend to hire more part time workers so as to avoid paying overtime to their permanent staff. Minimum wages are usually enforceable in law, and therefore, employers always ensure that they satisfy these legal requirements or face government interventions, labour disputes and legal battles. There are various effects of setting the minimum wage on firms, industry as well on the individual employees. Sometimes, setting the minimum wage leads to increased income tax liability, especially in economies where progressive tax system is used. Increase in wages may lead to an employee getting tax brackets that are higher than before, and therefore, they have to p.

1. Insert your surname 3
Name:
Instructor:
Institution:
Date:
Price Theory
Minimum wage is said to be the lowest compensation for labour
offered by a worker. It may be on hourly, daily or monthly
basis. In most countries the government is responsible for
setting the minimum wage in various sectors of the economy.
Various trade unions and other employees’ welfare groups have
also engaged employers in talks aimed at increasing the
minimum wage. They use collective bargaining agreements in
their engagements which are legally binding to the parties.
These unions seek to stop employees’ exploitation by ensuring
the employee’s output matches with their pay. Labour costs
determine the number of people a firm and an industry can
employ. Increased costs of labour lower the employment rate
thus leading to increased unemployment level. Unemployment is
a state in the economy where those who are willing and able to
offer services but are unable to get jobs. There are various
forms of unemployment that exists in a given economy. There
has been a wide spread debate on the effect of the minimum
wage on employment with argument being put forward for and
against. This paper seeks to explain the various arguments that
have been put forward about minimum wage with further
explanation of the effects that the minimum wage has on the
level of employment in a given economy.
The global work force has faced stagnating wages over a long
period of time irrespective of the prevailing economic status
and the performance of the firms in which they are working.
Economists have for a long period been at the forefront in
opposing minimum wage setting. The wage floor provides the

2. minimum point at which the salaries of labourers should not go
below. The economic theory of minimum wages seeks to explain
the effects in monetary terms arising from government and
social policies on the economy. Each country has its economic
principles that guide it in building its economy. Minimum wage
is an important aspect of the government policy on its citizens.
It seeks to ensure that all employees in the private and public
sector earn a decent pay as well as lead a quality life, thereby
having a living standard that is above the poverty line. Various
economic changes such as inflation necessitate the government
to set the minimum wages. Employers tend to hire more part
time workers so as to avoid paying overtime to their permanent
staff. Minimum wages are usually enforceable in law, and
therefore, employers always ensure that they satisfy these legal
requirements or face government interventions, labour disputes
and legal battles.
There are various effects of setting the minimum wage on firms,
industry as well on the individual employees. Sometimes,
setting the minimum wage leads to increased income tax
liability, especially in economies where progressive tax system
is used. Increase in wages may lead to an employee getting tax
brackets that are higher than before, and therefore, they have to
pay more in taxes than what was anticipated. Increased wages
also leads to increased company expenses which may sometimes
be untenable. The increased expenses make firms lay off some
employees in order to remain competitive and profitable. The
theory of demand and supply is supposed to regulate the labour
market, and therefore, set the minimum wage at the equilibrium.
Entry of wage control leads to distortion of this equilibrium,
and therefore, the demand and supply curve will shift the
equilibrium to match with the minimum wage set. During high
seasons, firms tend to increase their production to match with
the market need. To increase their production, the companies
require additional labour supply.
When minimum wage is set, companies are unable to hire
employees, and consequently, market inefficiencies occur since

3. the demands do not match the supply. The minimum wage is set
specifically to help non skilled employees. The skilled
employees always negotiate their pay prior to employment and
have labour unions that engage their employers on salaries
increases. The organizations agrees with skilled workers on the
level of payment to ensure the wage expense is sustainable in
the foreseeable future and matches with cost of doing business
as the company may desire.
The price theory seeks to explain the role of price in a given
economy. Price refers to the cost of acquiring the benefit of a
good or service usually expressed in currency form. The forces
of demand and supply are used to set the price in a free
economy. There various forms of prices such as selling price,
trading price, bid price, transaction price and asking price. A
wage is the price paid to workers which may be done on hourly,
weekly, after a fortnight or monthly basis. Prices are used to
indicate the value of a good or service. Labour is a service that
wages is paid for. In order to appreciate the value of service
offered by employees the minimum wage is set. Prices vary
from one sector of the economy to another as it does vary from
one good to another.
The argument for the setting minimum wage includes retention
of low skilled workers due to improved wages, alleviation of
poverty levels. The pros include employers avoiding low skills
low wage workers thus increasing poverty level. Fewer workers
are employed when the equilibrium wage is lower than the
minimum wage. This is because employers avoid this high cost
labour and invest in other inputs of the production such as
capital. The effect of this new scenario is increased product
prices thus reducing demand for labour hence reduction in
employment levels.Since minimum pay wage does not affect the
high skilled workers, most firms opt to hire more skilled
workers. This is referred to as labour to labour substitution. The
purpose of minimum wage being to assist the low skilled
workers then loses its meaning since it was intended to help the
unskilled workers rather than make them unemployed.

4. There exists monopsony in the labour market where there are
some firms with policies that tie their workers to the firm for a
certain period of time. Employment elasticity is used to measure
the change in employment as a result of change in minimum
wage payable to workers. Major studies have been carried out in
the United States to determine the effect of the minimum wage
on its citizens in employment. The focus has been on the
employment level of young people. These studies have
consistently proved that setting the minimum wage payable to
low skilled employees results in destruction of jobs. All the
studies carried on the effect of the wages, only 8% indicated
positive effect of setting minimum wage. The only exception to
this study was the study conducted in 1992 in New Jersey on
fast food restaurant. The study was compared with similar one
in Pennsylvania where there is no setting of minimum pay.
Results of the study indicated increase in the employment levels
in the fast food restaurants. There was a positive elasticity of
0.73. However, later studies in the area showed negative
correlation between minimum wage increase and employment
levels in the same fast food restaurants. Other studies in the
recent days have indicated that when economic conditions have
been factored in the study, they have revealed that minimum
wage setting has resulted in increased employment. This is a
result of declining labour supply of low skilled jobs especially
that which is offered by young people.
Georgiadis observes that the major argument for minimum wage
has always been to alleviate the poor levels of the low income
earners (970). The increase in salary results in increase in their
standard of living. Low income earners do not mean low income
families, and therefore, the intended purpose may not be
achieved. Sometimes, low income families may not have low
income workers and this policy of minimum wage increase may
have no effect on them. Some families may also have no one in
employment and therefore this policy of minimum wage is not
of any use. Studies in the United States have revealed that the
minimum wage has no compelling effect on low income

5. families. In order to help the poor, other policies must be
incorporated by the policy makers in order to serve this purpose
such as floor wages. The United States enacted the earned
income tax credit as a policy tool of solving this problem that
minimum wage failed to tackle. The aim of the policy enactment
was to offer low income earners subsides, thus enabling, able
and willing citizens to join the labour market. Poverty levels
were found to be very high in families where women are bread-
winners such as single mothers and EITC showed positive effect
on the income levels of these families. It offers labour supply
incentives to the members of these families. More people will
be willing to join the work force if the minimum wage is
increased and the adoption of the EITC thus increased
workforce supply competition in the labour market. This is
applied in the United States to support and stimulate
employment levels especially to single women. Results indicate
that unemployment effect occurs in different regions as well as
different income levels in the society. It is clear that higher
minimum wage does not improve the economic status of low
income earners families and poor families. This is as a result of
employers getting discouraged from employing low skilled
workers as result of increased minimum wage. The minimum
wage is aimed at low income earners as opposed to high income
earners. The program only works if only combined with other
policies thus it is ineffective if it is implemented alone.
Card, Katz and Krueger indicate that minimum wage was first
enacted in New Zealand, Australia followed and later in United
Kingdom. There are other countries which still don’t have the
minimum wage policy though the rates differ in each country
depending on its economic status. The gross domestic product
can used to measure the economic status of a country in offer to
set the minimum wage rate. Other factors to consider include
demand and supply levels of labour, costs of business
operations, growth in productivity levels, rankings on economic
freedom, living standards, prevailing rate of wages, inflation
and terms of employment existing in a given economy, where

6. there demand of product is highly inelastic employment is not
affected by minimum wage policy in some industries. This is
possible where the additional costs arising from increased
labour cost are passed to consumers through increased cost of
their products. In circumstances where minimum wage does not
result in increased cost to the firm the employment levels are
not affected. Sometimes the cost of training workers may
exceed the minimum wage thus a firm may prefer to increase
the minimum wage than train. This has the effect of maintaining
the employment level in its current state. In certain countries
such as the United States they set the minimum wage close to
the equilibrium wages prevailing in the market and therefore
setting minimum wage has no major effect on the existing
employment levels. This is done for the unskilled workers.
Economists have not supported laws on minimum wages as
opposed to the general public. Their opinions are dependent on
costs and benefits one accrues from the minimum wages. The
argument in favour of minimum wage comprise of the
following. The laws encourage consumption since more money
falls into the hands of poor and low income earners inform of
welfare payment. The small businesses owners get positive
impact. It leads to workers opting to train thus attain higher
paying jobs. The vulnerable people standard of living is
improved .efficiency and automation in industries is
encouraged. As the price of labour increases business adopts
technological development to increase their efficiency. Little
earners tend to have more work ethic as employers requires
them to do to match with the pay they are getting. The
government benefits from reduced welfare costs as the little
income earners are able to support themselves. The minimum
wage laws discourages little income earners from engaging in
illegal activities such as drug peddling since the pay is
encouraging them to work in formal employment. When wages
increase those who were working for long hours tend to reduce
their working time thus enabling other to gain employment
opportunities.

7. Those who oppose minimum wage do so for the number of
reasons. Economists’ Neumark and Wascher argued that the
minimum wage policy itself alone cannot completely or
effectively deal with poverty as those who are not in
employment do not benefit in any way (497). The living wage
could be higher than the minimum wage therefore poverty level
will still remain at its level. Inefficiencies in the labour market
may arise when there is economic down turn as firms cut costs
for survival. Small businesses that have insufficient funds are
the most hurt as compared to the large firms. They may end up
collapsing when they are unable to meet these costs. The
demand of workers decreases as firms try to deal with increased
costs. Price inflation may occur as firms try to recover
increased labour by incorporating them in the product price.
The benefit accrues to some workers as opposed to the poor in
the society who do not necessary be workers. The poor may be
enticed to enter the job market thus discouraging them to
further their education. Jobs may be moved to other areas where
labour costs are low. The end result of minimum wage policy
may be long term unemployment.
Countries in the process of setting minimum wages should
consider the pros and cons on employment levels in the country.
The policy makers can use other measures to address social
problems the population is faced with such as poverty among
others. These alternatives include negative income tax,
provision of social welfare through minimum income guarantee,
and use of refundable tax credit.
Work Cited
Card, David, Lawrence F. Katz, and Alan B. Krueger. 'Comment
On David Neumark And William Wascher, "Employment
Effects Of Minimum And Subminimum Wages: Panel Data On
State Minimum Wage Laws"'. Industrial and Labor Relations
Review 47.3 (1994): 487. Web.
Georgiadis, Andreas. 'Efficiency Wages And The Economic

8. Effects Of The Minimum Wage: Evidence From A Low-Wage
Labour Market*'. Oxford Bulletin of Economics and Statistics
75.6 (2012): 962-979. Web.
Neumark, David, and William Wascher. 'Employment Effects Of
Minimum And Subminimum Wages: Reply To Card, Katz, And
Krueger'. Industrial and Labor Relations Review 47.3 (1994):
497. Web.Neumark, David, and William Wascher. 'Employment
Effects Of Minimum And Subminimum Wages: Reply To Card,
Katz, And Krueger'. Industrial and Labor Relations Review 47.3
(1994): 497. Web.Neumark, David, and William Wascher.
'Employment Effects Of Minimum And Subminimum Wages:
Reply To Card, Katz, And Krueger'. Industrial and Labor
Relations Review 47.3 (1994): 497. Web.Top of Form
Bottom of Form
Georgiadis, Andreas. 'Efficiency Wages And The Economic
Effects Of The Minimum Wage: Evidence From A Low-Wage
Labour Market*'. Oxford Bulletin of Economics and Statistics
75.6 (2012): 962-979. Web.Top of Form
Bottom of Form
Neumark, David, and William Wascher. 'Employment Effects Of
Minimum And Subminimum Wages: Reply To Card, Katz, And
Krueger'. Industrial and Labor Relations Review 47.3 (1994):
497. Web.