Economic Costs and Benefits of Introducing Minimum Wage in a Competitive Labour Market - Essay Example

Economic Costs and Benefits of Introducing Minimum Wage in a Competitive Labour Market Introduction There are a lot of factors that contributes to inequality of wealth among individuals. Some people may have the benefit of being born from wealthy families. These people generally have the opportunity to have a greater ability to have better educational background during their childhood years. Others may be born in a country with a favourable cultural and genetic attributes when it comes to acquiring knowledge (Becker & Tomes 1986). Specifically the movements of the skilled and unskilled pay ratios clearly reflect the unequal distribution of wealth particularly between men and women (Williamson & Lindert 1980). Given that the parents are well educated, it is also expected that their children with have the equal opportunity for a good education. Aside from biological and cultural factors, industrialization has been pointed as the main cause of inequality which started between the agriculture and the industrial sectors. Industrialization can lead to a lesser demand for human resources. Therefore, increase in competition among the workers is possible. In line with this, the unequal resources such as the access to education between the rich and the less fortunate people resulted to a wider gap on the distribution of wealth between the two sectors of the society. Using the law of supply and demand, this study will examine the economic costs and benefits of introducing minimum wage within a competitive labour market. Eventually, whether or not there will be any changes in the economic cost and benefit analysis will be answered given that the only employer within the labour market is monopsony. Economic Costs and Benefits of Introducing Minimum Wage within a Competitive Labour Market Minimum wage is referring to the minimum hourly, daily, or monthly wage wherein employers are required to pay the workers in exchange of their service. Specifically in UK, the minimum wage is £5.93 per hour (BBC News 2010). Normally, the government implements the minimum wage law in order to protect the socio-economic welfare of the workers from abusive employers. As a result of implementing a minimum wage law, workers could enjoy the benefit of improving their standard of living by actually removing poverty from the lives of the people (Daniel 2010; Filion 2009). Since employed individuals will be able to receive a minimum wage, these people will be able to enjoy the benefit of spending more money on purchasing their preferred basic commodities which is necessary in order to stimulate the national and international economic growth (Daniel 2010). In other words, implementing a minimum wage is effective in terms of reducing the rate of urban poverty. Despite the long list of economic benefits associated with the act of imposing minimum wage within a competitive labour market, there are still some dilemmas whether or not implementing a minimum wage within the labour market could really be effective in terms of reducing the rate of poverty among the people. In line with this, let us examine the impact of minimum wage law on labour market in case of economic recession. As a result of industrialization and globalization, market competition tightens. By implementing a massive lay-off during a serious economic recession, business people will be able to financially support its fixed operational expenses. To enable large- and small-scale businesses to compete within the domestic and international markets, businessmen and women had no other choice but to minimize its fixed operational costs by controlling the number of its employees. In most cases, it is the less educated individuals and employees with lesser skill are often a victim of massive lay-off (Tupy 2004; Black 2002, p. 8). Since the government imposes a minimum wage, business people are left with no other choice but to cut down the number of its manpower by implementing a massive lay-off in case the country is facing serious economic crisis. In the long run, continuously implementing a higher minimum wage could definitely harm the ability of the government to create more job opportunities for unemployed individuals (BBC News 2010). As a result, increase in poverty rate, unemployment rate, market price hike, and other forms of economic inefficiencies are likely to happen (Tupy 2004). Let us examine the case using the basic law of supply and demand. In general, “if the prices go up, demand goes down” (Tupy 2004). Given that the economic condition within a country is good, the demand for products and services increases thereby creating more job opportunity for the people. As a result, the expected unemployment rate will be low. On the contrary, the expected unemployment rate will be high given that there is lesser demand for goods and services. Since there is a less demand for goods and services, demand for manpower also decreases (Tupy 2004). Since businesses should need to consider the impact of minimum wage law on business profit, most businessmen and women tend to decrease the number of its employees (Gwartney et al., 2003, p. 97; Card & Krueger 1995, pp. 6 – 7). The implementation of minimum wage violates or interrupts the natural flow in the law of supply and demand. Within a free market competition, demand and supply curve will move up to the point wherein equilibrium is present. Since there is no minimum wage requirement, demand for labour and supply of labour will continue to move or adjust until it meets the labour price as dictated by market demand for labour. (See Graph I – A Normal Supply and Demand Curve of Labour in a Free Market below) Graph I – A Normal Supply and Demand Curve of Labour in a Free Market In the case of implementing the minimum wage, demand and supply curve cannot meet together to form the equilibrium point. Since demand and supply curve is not allowed to meet the equilibrium point, there is a higher chance that the cost of labour would be higher than what is actually required in a free market competition. (See Graph II – Supply and Demand Curve wherein Minimum Wage is imposed by the Government below) Graph II – Supply and Demand Curve wherein Minimum Wage is imposed by the Government Based on the presented Graph II, it is clear that the higher the wage requirement would mean lesser number of workers will be given the opportunity to be hired by business people. Given that a high minimum wage law can be very costly on the part of the businesses, it is possible for us to experience having an oversupply of labour given that there is a serious economic recession in the country (Sowell 2007, pp. 210 – 212). This can be noted with the significant increase in the rate of unemployment. Possible Changes in the Economic Cost and Benefit Analysis Given that the Only Employer within the Labour Market is Monopsony The concept of monopsony in the labour market is about having only a single business enterprise with a large group of people who are seeking for employment opportunities. Since there is an imperfect market competition in the labour market, the workers will have a lesser bargaining power over the employer. The problem with this kind of labour settlement is that excessive power of the business enterprise could increase their ability to hire more employees at a much cheaper wage. In the absence of government intervention through the use of minimum wage law, the socio-economic welfare of the workers will suffer. Let us examine the concept of monopsony using the basic supply and demand curve. Since a monopsonist employer aims to take advantage of labour by maximizing the company’s revenue, there is a higher potential for the monopsonist employer to disregard the movement of marginal revenue product curve and the marginal cost of wages (represented by point ‘A’). Instead of taking the movement of marginal revenue product curve and the marginal cost of wages into consideration, a monopsonist employer has the tendency to focus on the movement of supply of labour and the marginal revenue product curve (represented by point ‘B’ and ‘C’). Given that a monopsonist employer tends to hire more labour in exchange of lower wage rate, the employer will be able to enjoy higher profit at the expense of the labour force. (See Graph III – Supply and Demand Curve of Monopsonist Employer in the Labour Market on page 8) Graph III – Supply and Demand Curve of Monopsonist Employer in the Labour Market Let us examine the impact of implementing a minimum wage law on monopsonist employer in the labour market. Given that the presence of minimum wage law requires the monopsonist employer to pay the workers with a minimum wage, the number of labour a monopsonist employer can hire will be limited as represented by ‘L2’. (See Graph IV – Impact of Minimum Wage Law in the Supply and Demand Curve of Monopsonist Employer in the Labour Market on page 9) Graph IV – Impact of Minimum Wage Law in the Supply and Demand Curve of Monopsonist Employer in the Labour Market Discussion Implementing a minimum wage has its advantages and disadvantages over the labour market. Given that the government decided to impose a minimum wage requirement on employers, the workers can be protected from abusive employers who are only after their own gain. On the contrary, the use of minimum wage law could badly affect the labour market in the sense that a higher unemployment rate is expected in case of economic uncertainties due to the fact that the supply of labour is not allowed to move freely with the demand for labour. Between a free labour market and a monopsony case, the use of minimum wage law is more advantageous when applied to a monopsony employer. Since there is imperfect market competition within a monopsony labour market, the use of minimum wage law is effective in terms of protecting the socio-economic benefits of the workers. Conclusion and Recommendation In a free market competition, the curves of supply of labour and demand for labour are allowed move freely up to a point where it reaches the equilibrium point. In the case wherein minimum wage law is imposed by the government, the curves of supply of labour and demand for labour cannot move freely because of the minimum wage requirement. In general, the implementation of minimum wage law has a long list of benefits and costs to the labour market. Aside from protecting the workers from greedy employers, this kind of labour law could somehow increase the standard of living of the employed individuals. The problem with this law is that more people will suffer from becoming unemployed in case of economic crisis. Although it is best to use the minimum wage law in a monopsony labour market, this strategy can still be applied to labour market with free competition. In order to minimize the socio-economic consequences of minimum wage law on a competitie labour market, the government should prevent imposing a very high minimum wage requirement to avoid negative economic consequences such as a high poverty rate, unemployment rate, market price hike, and other forms of economic inefficiencies especially during a serious economic recession. References BBC News, 2010. Minimum wage up to £5.93 an hour. [online] Available at: [Accessed 9 November 2010] Becker, G., and Tomes, N., 1986. Human Capital and the Rise and Fall of Families. Journal of Labor Economics , 4(3): 2. Black, J., 2002. A Dictionary of Economics. 2nd Edition. Oxford University Press. Card, D., and Krueger, A., 1995. Myth and Measurement: The New Economics of the Minimum Wage. Princeton University Press. Daniel, A., 2010, April 29. eHow. Living Wage Vs. Minimum Wage. [online] Available at: [Accessed 9 November 2010] Filion, K., 2009, July 21. Economic Policy Institute. EPI’s Minimum Wage Issue Guide. [onlne] Available at: [Accessed 9 November 2010] Gwartney, J., Stroup, R., Sobel, R., and Macpherson, D., 2003. Economics: Private and Public Choice. 10th Edition. Thomson South-Western. Sowell, T., 2007. Basic Economics. A common sense guide to the economy. 3rd Edition. New York: Basic Books. Tupy, M., 2004, May 14. Minimum Interference. Market restrictions hurt. [online] Available at: [Accessed 9 November 2010] Williamson, J., & Lindert, P., 2005. American Inequality: A Macroeconomic History. New York: Academic Press. In Rosenbloom and Stutes (2005) ‘Re-examining the Distribution of Wealth in 1870’. [online] Available at: [Accessed 9 November 2010] Read More