Minimum wage refers to the price in which it is illegal to buy or sell labor. Minimum wage is normally set by governments and tend to be above the market wage. Under normal conditions, the price of wage will be set by an interaction between the supply of labor and the demand for labor. The market determined wage is referred to as market wage.
Binding wage occurs when the minimum wage is above the market-determined wage. The number of people absorbed into employment tends to be low as the number of people willing to work at the new price increases. On the other hand, firms are not willing to absorb the high number of available employees hence unemployment increases as graph above illustrates.
2.
The minimum wage as per the Fair Work Commission from July 2018 is $ 18.93 per hour
3.
Equilibrium market wage is established by determining the point at which the quantity of labor demanded is equal to the quantity of labor supplied.
Demand for labor Nd = 1,500,000 -60,000W
Supply for Labor Ns = 120,000W- 1,200,000
W is the wage rate per hour
1,500,000 -60,000W = 120,000W – 1,200,000
1,500,000 + 1,200,000 = 120,000W + 60,000W
2,700,000 = 180,000W
W=15
The equilibrium wage is 15
Labor supply in hours (‘000)
Wage price (AUD)
The quantity of unskilled labor employed in Australia will be;
Labor demand = 1,500,000 - 60,000(W)
Labor demand = 600,000
The number of employed unskilled labor stands at 600,000 people
4.
a. Consumer Surplus
5 times 600,000 divided by 2
1,500,000
b. 15 times 600,000 divided by 2
4,500,000
c. Total Surplus
Total Surplus = Consumer Surplus + Producer Surplus
Total Surplus = 1,500,000 + 4,500,000
= 6,000,000
5.
I. An imposition of $ 19 as the minimum wage will automatically lead to a decrease in the number of hours
Labor demand = 1,500,000- 60,000(19)
=1,500,000 -1,140,000
= 360,000
Decrease in wage hours = 600,000 -360,000
= 240,000 labor hours
II. The minimum wage leads to a decrease in wage hours by 240,000 hours
the wage surplus created by the minimum wage of $19 is
(19-6)360,000 + (6)360,000/2
4,680,000 + 1,080,000
5,760,000 labor hours
6.
a) Consumer Surplus
Qd = 360,000
Consumer surplus = (20 – 19) times Qd divide by 2
= 1(360,000)/2
= 180,000 labor hours
b) Producer Surplus
(19-6)360,000 + (6)360,000/2
4,680,000 + 1,080,000
5,760,000 labor hours
c) Total Surplus
Producer Surplus + Consumer Surplus
5,760,000 + 180,000
5,940,000 labor hours
d) Resources lost in job search
Reduction in wage hours times increase in the minimum wage
240,000 times 4
= 960,000
e) Dead weight loss
Area of deadweight from consumer surplus + area of dead weight from producer surplus
(19-6)240,000 divide by 2
3,120,000/2
Dead weight loss = 1,560,000
7.
I. Firms
The firms in the above graph are well-off as they have access to a highly qualified workforce. They are better off paying the high amount set by the government to attract highly skilled workers as compared to low amount which attracts low skilled workers.
II. Workers
In this case, the work force will be undermined with the enforcement of high pay which might compel firms not to absorb a reasonable number of the available workers, a means of cutting cost depending on the available resources. Firms are more focused on attracting the highest skilled workforce. The number of people locked out of the labor force increases tremendously as a result of the minimum wage enforcement.
III. Society
The society is the biggest loser in the overall scenario as the number of people employed by firms decreases and the unemployment rate shoots up.
8.
i. Consumer surplus when resource lost is captured by the workforce remains the same as before
= 180,000 labor hours
ii. Producer surplus
5,760,000 + 960,000
=6,720,000 hours
iii. Total Surplus
6,720,000 + 180,000
= 6,900,000
9.
Based on the recalculations in Q8, my observations in Q7 still hold.
(i) The firm still minimizes the number of the workforce it is absorbing from the labor market due to the marginal cost of the worker to the firm
(ii) The worker's marginal cost increases and the number of people willing to work but not able to find work at the set wages also increases.
(iii) The society as a whole is faces limitations due to the number of people unemployed. Even though those employed earn substantial wages, the number of people unable to cater for themselves is high leading to high dependency on the state.
10.
Allocative efficiency
Allocative efficiency refers to the optimal distribution of the available resources to achieve the highest level of equity. Setting the minimum wage which tends to be above the market wage is intended to ensure that workers are able to earn a decent living. As per the above diagrams, we see that the minimum wage tends to lead to a decrease in the number of workers absorbed in the market. This means the meager resources available in the form of jobs are distributed to a few highly skilled people locking out the low skilled and unskilled workers.
Even though the intended goal of a minimum wage is to uplift the lives of the workers, we always find that it has the opposite effect since the workforce that is always retained are workers who are skilled and might be already receiving the high pay. The intended section of the workforce is locked out of the workforce hence from an allocative efficiency perspective, minimum wage does not achieve optimal utilization of resources.
11.
Improving Standards of living for unskilled workers
A perfect market where there is no government interference is the desirable market environment, but when the prices are set by the market, the level of exploitation in terms of wages is high. This tends to lure the government’s involvement which in turn exposes the market to government’s dictation and sometimes, exploitation. In the case of the labor market, the price floor is set in terms of minimum wage. This is the exploitative wage bar which is below the minimum wage standards.
When the minimum wage is set at a price that is higher than the equilibrium wage, people in the labor force willing to work automatically goes up since the renumeration is attractive. On the other hand, the cost of labor on the firms also shoots up and firms prefer reducing the number of unskilled workers they hire. This locks out a high number of unskilled workers as firms prefer paying the high wages to skilled workers. Even though the aim of the government is to improve the living standards of unskilled workers, the market defaults to preference of skilled labor thus limiting opportunities for the unskilled labor population, hence losing its objectivity.
12.
Is minimum wage good or bad?
Minimum wage proponents have the best of intentions whenever advocating for its policies, but does it really help the workers? In the unskilled workers market, the law of demand and supply are prevalent. Raising minimum wage increases competition for jobs available in the market hence increasing supply, but employers on the other hand, are determined to minimize the cost of labor.
The least qualified workers are automatically laid off from their jobs since firms are not willing to allocate more wages for unskilled labor. Qualified personnel on the other hand are on high demand and firms are willing to pay the high amount to retain the worker.
Minimum wages forces organizations to look for alternative labor sources such as automation on key services. In other sectors, the minimum wage leads to the influx of employing illegal immigrants who are willing to take the lower pay. The market has a self-correction aspect that determines prices with minimal interference hence should not be altered through enaction of minimum wages. Work productivity should be key in determining wages.
