Minimum wage is described as ''the minimum amount of salaries provided by an employer to pay employees for services provided after a given time frame which cannot be decreased by an individual contract or collective agreement.'' This concept applies to the contractual value of minimum wages, irrespective of how they are set. Minimum wages may be fixed by law, a qualified authority's decision, a salary committee, industrial, tribunals, or labor courts. It is also possible to set minimum wages by offering the force of law to providers of employment contracts.
Minimum wages are intended to protect employees from unreasonable low wages. They also secure a just and fair share of the benefits of prosperity to all, as well as a minimum living wage for all those who are working and need this support. Minimum wage could also be part of a strategy to address injustice and minimize inequality, particularly gender inequality, by upholding the right to fair compensation for jobs of equal value.
Supply and demand models suggest that there may be welfare and employment losses from minimum wages. But if the labor market is in a monopsony state (with just one recruiting contractor available), minimum wages will improve business efficiency.
Binding minimum wage results in numerous adverse effects in a competitive labor market. "A minimum wage is said to be binding if it is set above the equilibrium wage. With a binding minimum wage, adjustments of wages are prevented, and the economy is restricted from allocating labor resources (Parkin et al., 2008)".
There is said to be an equilibrium rate on the labor market. It is where the demand and supply lines on the graph of the minimum wage intersect since it is the level where the pay scale is equal to the number of hours worked/required. In a competitive labor market, a binding minimum wage means that this equilibrium point is offset as the pay rate must rise.
Using two broad assumptions, we analyze the employment consequences of the minimum wage: in the first scenario, many businesses are vying to attract employees; in the second, there is just a single employer. Such extremes offer us two standards from which the market and specific conditions can be addressed.
A thoroughly efficient labor market is a combination of various companies vying for employees. Companies are powerless when it comes to setting wages; the market determines a competitive wage. If a business ignores this wage, either they pay less and lose employees or pay higher, suffer losses, and close shop.
At the other extreme, there is a labor market, which is a series of local small businesses. Many companies are in a dominant recruiting role in each regional market (for example, think of a massive retailer near a small town). A significant employer has the power to set a wage unilaterally without fear of competition in such an employer-dominated market (referred to by economists as a monopsonistic market).
A binding minimum wage is likely to take the business off the market as a result of loss accumulation. If the salary rate rises and all workers get paid a higher wage, the employer cannot continue to recruit as many people as it will be more costly, so not only do they need to pay more for the quality jobs, but they also have to pay a higher price than they would have expected for employers to do the less skilled jobs. It ensures that on the supply side, there will be people who won't be able to get a job, so the rate of unemployment increases.
The minimum wage isn't efficient as Parkin notes, "ends in homelessness–insufficient human capital–and futile search for jobs." Looking at a minimum wage graph, there is a presence of deadweight loss. This is due to a decline in both the surplus of workers and the surplus of the company. A potential loss from a job search appears in that inefficiency graph. This failure is said to happen "because someone who finds a job receives little every hour, but would have been willing to work for more'' This inefficiency affects the labor market because it results in a deadweight loss of more than one million hours of work annually.
The primary argument tendered in favor of minimum wage is its assistance to poor and low-income families; however, the adverse effects of minimum wages in labor markets remain. It creates winners and losers, especially in the employment section. The winners are offered higher wages with no reduction in working hours while the losers have to bear losing their job, getting their hours reduced, or finding it difficult acquiring a job. In a situation whereby there are enormous gains for the winners, and if these winners are from the low-income families helped by policymakers, then the misfortunes witnessed by the losers as a result of an increase in the minimum wage is acceptable. However, there is barely research that states that produces proof of minimum wages helping the poor; instead, it increases the amount of poor and low-income families.
The major problem with increasing the income of low-income families through minimum wage usage is that the policy mainly targets low-wage employees and not low-income families. According to a study by David Neumark, in the US, the link between low wages and low family income is quite weak for three reasons. First, over half (57%) of low-income families with heads of household aged 18–64 have no workers (calculations based on 2014 Current Population Survey data). Second, some workers are poor because of low hours rather than low wages; in the same data, 46% of poor workers have hourly wages above $10.10, and 36% have hourly wages above $12. And third, because teenagers are highly overrepresented in the minimum wage workforce, many low-wage workers are not in low-income families. As a result, back-of-the-envelope calculations suggest that when the minimum wage increases, assuming no job loss, far more of the increase in income goes to families in the top half of the income distribution than to families below the poverty line.
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