The effects of minimum wage on employees Essay - 4530 Words



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The effects of minimum wage on employees

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Minimum Wage
Minimum wage refers to the least remuneration on a daily, hourly, or monthly basis legally paid to employees by their employers. Similarly, it is the least wage at which workers are willing to sell their labor. Minimum wages are established by the government legislation or by a contract. This implies that paying an employee below the minimum wage is illegal. Minimum wage may, however, exist without a law. Extra-legal and custom pressures from labor unions and governments may set a minimum wage, though not legally binding (Wilson, 2012). This is done through collective bargaining. Collective bargaining is the negotiations between employees and their employers seeking to establish agreements that govern working conditions. A minimum wage plays a crucial role in today business operations as it affects the ability of businesses to hire employees. The minimum wage rate legislation was first enacted in Victoria, Australia in 1894. Prior to this, there were efforts to control wages as trade unions were being decriminalized via a collective agreement during the 19th century. The minimum wage movement aimed at halting sweatshop labor to avoid or reduce industrial friction (Beman & Wolfson, 2010). Sweat shop labor involves working for a more extended number of hours in deplorable conditions for a very low pay. The minimum wage seeks to guard employees against exploitation by organizations they work for and enable them to afford the necessities of life. The supporters of minimum wages argue that it boosts living standards of the workers, reduces poverty, eliminates inequality, enhances efficiency in businesses, and boosts morale of the employees (Flinn, 2010). The minimum wage varies in different countries, provinces or states due to the unique compensation structures present in the industries. Economists have over the years strongly criticized a minimum wage rate since it constitutes a price floor for wages. The establishment of these price floors may lead to the occurrence of dead weight loss in the economy and increased possibilities of the economic inefficiencies. Companies would in such a situation prefer to hire fewer workers, resulting in unemployment especially with regard to workers with low productivity (International Labor Organization, 2010). Minimum Wage Models

Economists have developed various models to help them understand the implications of setting a minimum wage on other micro-economic variables. The current studies related to this wage focus on estimating the extent to which a higher minimum wage increases the rate of unemployment (Wilson, 2012). The main interest of researchers is the examination of implication of minimum wage legislation on the length of an employee’s shifts, worker training, human resource practices, firm profits, and operational efficient and internal wage structures. Three models are used in the analysis of implications of the minimum wage legislation, namely institutional, competitive and monopsony models. Institutional Model

The institutional model of labor markets borrows its concepts from behavioral economics. The model emphasizes that there is an imperfect competition in labor markets, that these markets are socially embedded, institutionally segmented and susceptible to over-supply (Wilson, 2012). Psycho-social aspects and factors related to technology determine operation costs and productivity in the labor market.

Economists favor this model of a minimum wage since the adjustment of minimum wage upward may not have any employment effect in the short run (International Labor Organization, 2010). The expected response of the employers is to seek for ways of absorbing increased wages instead of laying off workers. The possible ways of absorbing costs include expansion of sales, improvement in service provision and general economic expansion (Wilson, 2012). The proponents of the institutional model believe that improving... Show More

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