PRICE LEGISLATION OR PRICE CONTROL

Minimum Wage

A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay
to employees or workers. Equivalently, it is the lowest wage at which workers may sell their
labour. The purpose of minimum wage law is to increase the standard of living of workers and
reduce poverty. Although the goals of the minimum wage are widely accepted as proper, there is
great disagreement as to whether the minimum wage is effective in attaining its goals. From the
time of their introduction, minimum wage laws have been highly controversial politically, and
have received much less support from economists than from the general public.

It is assumed that workers are willing to labor for more hours if paid a higher wage. The wage is
graphed on the vertical axis and the quantity (hours) of labor supplied on the horizontal axis.
Since higher wages increase the quantity supplied, the supply of labor curve is upward sloping.

A firm's cost is a function of the wage rate. It is assumed that the higher the wage, the fewer
hours an employer will demand of an employee. This is because, as the wage rate rises, it
becomes more expensive for firms to hire workers and so firms hire fewer workers (or hire them
for fewer hours). The demand of labor curve is therefore shown as a line moving down and to the
right.
Combining the demand and supply curves for labor allows us to examine the effect of the
minimum wage. We will start by assuming that the supply and demand curves for labor will not
change as a result of raising the minimum wage. This assumption has been questioned. If no
minimum wage is in place, workers and employers will continue to adjust the quantity of labor
supplied according to price until the quantity of labor demanded is equal to the quantity of labor
supplied, reaching equilibrium price, where the supply and demand curves intersect. Minimum
wage behaves as a classical price floor on labor. Standard theory says that, if set above the
equilibrium price, more labor will be willing to be provided by workers than will be demanded
by employers, creating a surplus of labor i.e. unemployment.

Arguments in favor of Minimum Wage Laws

Supporters of the minimum wage claim it has these effects:

 Increases the standard of living for the poorest and most vulnerable class in society and
raises average.[1]
 Motivates and encourages employees to work harder (unlike welfare programs and other
transfer payments).]
 Stimulates consumption, by putting more money in the hands of low-income people who
spend their entire paychecks.
 Increases the work ethic of those who earn very little, as employers demand more return
from the higher cost of hiring these employees.
 Decreases the cost of government social welfare programs by increasing incomes for the
lowest-paid.
 Encourages the automation of industry.
 Encourages people to join the workforce rather than pursuing money through illegal
means, e.g., selling illegal drugs.

Opponents of the minimum wage claim it has these effects:

 As a labor market analogue of political-economic protectionism, it excludes low cost

competitors from labor markets, hampers firms in reducing wage costs during trade
 downturns, and generates various industrial-economic inefficiencies as well as
unemployment, poverty, and price rises, and generally dysfunctions.
 Hurts small business more than large business.
 Reduces quantity demanded of workers, either through a reduction in the number of
hours worked by individuals, or through a reduction in the number of jobs.
 May cause price inflation as businesses try to compensate by raising the prices of the
goods being sold.
 Benefits some workers at the expense of the poorest and least productive.
 Can result in the exclusion of certain groups from the labour force.
 Is less effective than other methods (e.g. the Earned Income Tax Credit) at reducing
poverty, and is more damaging to businesses than those other methods.
 Discourages further education among the poor by enticing people to enter the job market.