Explain how the introduction of a minimum wage may affect the level of employment in theory. Examine and critically assess the e - Essay Example

Download file to see previous pages... When the government enforces the laws of minimum wages, then the market forces are disturbed and equilibrium ceases to exist creating a gap between the demand and supply, which is of labor in this case. The disequilibrium in theory results in a rise in the supply of labor but the demand reduces as the labor is now more costly. However, the magnitude by which this disequilibrium is caused depends upon the circumstances prevailing in each economy and varies from country to country which we will see later. The diagram to the right shows the labor market curve. When the market forces were independent and not disturbed, the market was in equilibrium that is the supply and demand curve intersected at a point which is known as the equilibrium point represented as L0 with the quantity of labor and W0 as the equilibrium wage rate. However, the market forces were disturbed and the minimum wage rate was introduced with the representation of Wmin. This created disequilibrium in the economy and the supply and demand curves no longer intersect at the equilibrium point. There now is a gap between the demand and supply of labor which is equivalent to L2-L1 and this is the excess labor which is not required. Since the employment has gone down from L0 to L1, this shows that the implementation of a minimum wage policy results in a decline in unemployment in an economy. Several economists and business owner, small businesses in particular, have voiced their concerns that minimum wages will result in a rise in unemployment. The worst aspect of this rise in unemployment is the fact that the people who will be most affected are the poor people who are not too educated. When the minimum wage policy will be implemented, the costs of hiring on part of the employers will rise and they will be forced to wither cut the current staff or freeze their hiring programs. They think that the poor and uneducated people will be most affected since the policy is affecting only them. The educated or wealthy people are already employed on jobs at higher management levels and their current wages or salaries are nowhere near the minimum wages. It is the lower level staff whose wages are affected and hence the employers will be forced to take action against these employees. However, a liberal think tank with the name of Economic Policy Institute have conducted a research and it has suggested that there is little evidence to suggest that there is more or less no difference in the employment levels between states in America in some industries even though there is a difference in the minimum wage rates among the states. This suggests that the impact of an introduction of minimum wage policy is dependent upon other factors as well that is industry to industry in this case. This suggests that a minimum wage policy may not have such a significant impact as economists have previously suggested. As a matter of fact, it may even increase employment in some cases because the workers were actually being paid less than the worth of revenue and profits that they were contributing to the firm economically. The findings have gone as far as suggesting that rather than creating disequilibrium in the market as a result of minimum wages, it may even help the market to come nearer to the equilibrium level by forcing the employers to pay a fairer wage to the employees. Furthermore, the employers always have the choice of reducing the supervision, training, and recruitment costs in order to balance ...Download file to see next pagesRead More