Economic Effects of Minimum Wage Fixation - Essay Example

Labor economics The concept of minimum wage fixation has had double impacts on employment and the economy at large. While the main idea behind fixing minimum wage that workers should be paid is to make the lives of the workers better, through affording them a substantial income, it may affect the same workers, especially those with low skills negatively (Ehrenberg and Smith, 47). According to the standard competitive model of labor, fixing a minimum wage has the impact of increasing unemployment, through he creation of involuntary unemployment, where individuals can continuously apply concerted efforts o seek for a job but find none. This is because, setting the wage payable to a certain minimum level has the effect of increasing the operational costs of the firms operating in a competitive market, through the increment of operational expenses in terms of wages and salaries (Ehrenberg and Smith, 159). This can force firms to adapt to this change through reducing the number of employees or even raising the qualification standards for individuals to be recruited for such job positions, since they cannot compensate the lack of skills with wage reduction. The implication of this is that; those individuals who have low skills will not get employment opportunities, since the firms will have reduced their employee threshold, or increased the requisite qualifications (Ehrenberg and Smith, 78). Additionally, according to the standard competitive model of labor, the fixation of minimum wage levels in a competitive market has the effect of shifting employment from the sectors affected by the minimum wage fixation, to the others which are not affected, such as the black markets. However, the case is different according to the Monopsony model of labor, which holds that the fixation of minimum wages has the effect of increasing employment, most especially when the wage is being increased from levels lower than the competitive wage, to reach the competitive wage levels (Ehrenberg and Smith, 112). This is because, the increment in wages to the competitive wage level will have the effect of lowering labor turnover for the few firms that are operating in the market, thus increasing productivity, boosting the employment opportunities, while also reducing the price levels for commodities (Ehrenberg and Smith, 203). On the other hand, the efficiency wage model of labor observes that increasing the wages for the workers will motivate them to work even harder, while increasing their fear of losing their jobs which are well paying (Ehrenberg and Smith, 94). This boosts the morale of the workers and make them highly motivated while undertaking their duties, an aspect that increases their productivity, and by extension, the productivity of the firm and the whole industry. This way, more employment is created, since improved productivity comes with increased opportunities (Ehrenberg and Smith, 378). Thus, according to the efficiency wage model, fixing the minimum wage, to a level higher than the competitive wage level, will promote productivity and discourage labor turnover, thus increase employment. Therefore, assuming the employment will continue rising as it has happened since June 2009, the empirical researchers need to face the following issues, to distinguish the correlation between minimum wage and employment rates, from the causal effect of minimum wage on employment. First, the empirical researchers should understand the issue of market operations, whereby different types of markets will give different results, when it comes to the relationship between minimum wage and employment. For example, an open competitive market will give different results, compared to a monopsony market, when it comes to the correlation between minimum wage and employment (Ehrenberg and Smith, 112). Secondly, the researchers need to understand the nature of the movement of the wages and the maximum level attainable in minimum wage fixation, before the correlation between the minimum wage and the employment changes from positive to negative. The correlation existing when there is an upward move from a wage level that is below competitive level to match the competitive level, is different from the correlation obtainable when the shift is from the competitive wage level to a much higher level. Thirdly, the researchers need to understand that minimum wage fixation affects the lower spectrum of the workers who earn low wages and are not well trained, as opposed to the well trained, experienced and handsomely compensated ones (Ehrenberg and Smith, 476). While the causal effect of minimum wage on employment is increased unemployment rates, the correlation differs, depending on these issues. The evidence studied suggests that the increases in minimum wages will cause a reduction of employment rate in California, while increasing the employment in San Jose. This is because, the fixation of minimum wage will set the wage level higher than the current minimum wage level in California, prompting the firms and businesses to adapt measures that will protect their profit levels, such as layoffs, reduced worker benefits or reduced worker training (Ehrenberg and Smith, 59). This is contrary to the causal effect in San Jose, where employment will be created, as a result or reduced minimum wage level from the one to be effected in March, which reduces firms’ expenses and thus increases their profitability. This enhances employment creation by the firms. The minimum wage can only go high, up to the competitive wage level, after which it will start having negative impacts. This is because, an increase in wage level from levels lower than the competitive levels has the impact of boosting the morale of the workers and increasing their levels of motivation, thus increasing their productivity, and consequently that of the firms (Ehrenberg and Smith, 261). However, an increase in minimum wage beyond the competitive level will increase the expenses of the firms, leading to layoffs or leading to the firms quitting the industry, which will increase unemployment. Works Cited Ehrenberg, Ronald G, and Smith Robert. Modern Labor Economics: Theory and Public Policy. Upper Saddle River, N.J: Prentice Hall, 2011. Print. Read More