Minimum Wage

Question 1

Minimum Wages

Minimum wages are the lowest amount of compensation that employers are required to pay their employees. Minimum wage is established by a contract or legislation by the government. Once the legislation has been passed it becomes illegal to pay employees below the set rates. It tries to protect employees from exploitation, and enable them to attain desired basic needs (Cunningham, 2007). Despite minimum wage laws being in effect in a variety of jurisdictions, there exists drawbacks and benefits to the situation.

Arguments in Favor of Minimum Wage

Among the advantages of minimum wage is that it motivates employees to work hard. Employees usually have the option of using their hours either for leisure or engage themselves in income generating activities. When the minimum wage is high, employees will tend to lose a lot if they opted to enjoy leisure (Flinn, 2011). As a result, they will tend to work more so as to gain more in the long-run. However, if the wages were low, there is no motivation and many people would opt to enjoy their hours on leisure since there is not much to lose.

Minimum wage also improves the living standards of the poorest and most vulnerable class in society. This class usually involves unskilled and semi-skilled employees whose wages are substantially low based on their levels of expertise. As a result, it becomes difficult for them to supplement their daily needs. If minimum wage was to take effect, there would be a rise in their income levels hence bringing improvement in their living standards.

It stimulates consumption by putting more money on the hands of low income earners. This is because their consumption pattern is known and they tend to spend their entire paychecks. This increases revenue to the government and other relevant stakeholders involved in the process. It would be a favorable step in initiating economic growth.

Minimum wage reduces the cost of government social welfare programs. When the income of the lowest paid people in the labor market increases, people can afford most of the social goods and services hence leaves the government to spend less on these issues. More money is availed for other developmental projects (Flinn, 2011).

It is easy to administrate the minimum wage requirement. Employees in various industries are required to report any organizations that have not complied with the requirements (Cunningham, 2007).  This will minimize any need for large enforcement agencies.

Enhancement of the minimum wage also has no budget consequence to the government. There is no need for increasing the taxes so as to facilitate the process and neither is there a need for rising borrowing requirement to fund the process.

Arguments against Minimum Wages

Minimum wages tend to reduce the quantity of workers demanded in every industry. As the minimum wage increases, cost to the business also increases proportionately. As a result, there is a huge decline in the profitability prospects. This prompts organizations to reduce the number of employees required to perform certain tasks. In the long-run, it results to massive unemployment levels (Flinn, 2011).

This mechanism is deemed to have more effect on small businesses compared to large ones. This is because small businesses are associated with minimal profits hence by setting the minimum wage it would mean derivation of minimal profits if any. On large businesses on the other hand, there would not be any effect since the profits realized are huge.

As time goes by, businesses will try to compensate for the extra cost that has developed. An appropriate way of doing this would be by increasing the prices of goods and services being produced. Consumers would tend to suffer since this will result to inflation and increased cost of goods and services provided (Jacobsen & Skillman, 2004).

To some extent minimum wage discourages further education on the side of poor individuals. They will be enticed to enter the labor market due to lucrative wages being offered.

Minimum wage would also result to outsourcing and loss of domestic manufacturing jobs to other countries. Businesses would engage in these activities in such of other cheaper alternatives in their production processes.

Question 2

Regional wage differences may not persist in a market based on the nature of labor markets available in the economy. This can be illustrated by taking a look at a scenario that comprises two labor markets in a given industry. We can take an example of a labor market existing in the South and another one from North. There is an assumption that the two markets entail individuals with similar skills hence making them perfect substitutes.


From the diagrams, the vertical lines imply that supply is perfectly elastic in both regions. The diagrams show that the equilibrium wage in North (Wn) is more compared to the equilibrium wage in south (Ws).

This wage differential cannot persist and present a true competitive equilibrium. Workers based in south are aware that their northern counterparts earn more due to perfect information that is available in perfect competitive markets. The wage differential will encourage them to live their region and move north in order to attain high utility levels through increased income. Employers on their part assess the situation in the Southern region and make the decision to move there due to wage differentials which will help in generating more profits. At the end of the day, workers in both regions possess similar skills.

If workers have the ability of moving across regions freely, the migration flow will shift the supply curves in both regions. In the south, the supply curve would shift to the left (      ) as southern workers leave the region hence raising the southern wage. In the north, supply curve would shift to the right (      ) as the southern workers arrive. This depresses the Northern wage. If there existed free exits and entries in the labor market, the national economy would be characterized by single wage W.

Wages would also come to be equal if the firms had the ability of moving freely from one labor market to another. When Northern firms close their plants and move to the south, the demand curve for northern labor shifts to the left and lowers the northern wage. The demand curve for Southern labor on the other hand, shifts to the right hence raising the Southern wage. Incentives for firms to move across markets are extinguished once the regional wage differential disappears.

In conclusion, as long as firms and workers can freely enter or exit the labor markets, a single wage will dominate a competitive economy.



Cunningham, W. V. (2007). Minimum wages and social policy: lessons from developing    countries. Washington, DC: World Bank.

Flinn, C. J. (2011). The minimum wage and labor market outcomes. Cambridge, Mass.: MIT        Press.

Jacobsen, J. P., & Skillman, G. L. (2004). Labor markets and employment relationships a             comprehensive approach. Malden, MA: Blackwell Pub..


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