Minimum Wage
"The smallest amount of money that employers are legally allowed to pay someone who works for them".
The question of fixing a minimum wage for the workers by a competent authority is gaining importance in every industrial country. The government or the trade union of a country may fix a minimum wage of all the workers on a national scale or in a few sweated industries. This step is taken to avoid or reduce the industrial friction.
Reasons for setting minimum wage.
- To. satisfy the workers' needs so as to raise their standard of living.
- To protect workers from being exploited by the employers.
- To increase the purchasing power of the workers so as to increase their consumption expenditure i.e. to raise the aggregate demand of the workers.
- To minimise industrial disputes resulting from the trade union activities.
- To reduce the level of income inequality by raising the earnings of the low paid workers.
Advantages of Minimum Wage
The advantages for fixing the minimum wage for the labour are as follows:
- Ensures Minimum Standard of Living. If minimum wages are fixed for all the workers, it will ensure minimum standard of living for all of them. The labour will be sure of the reward and they will not be at the mercy of the employers who are always bent upon exploiting them.
- Effect on Efficiency. When the labourers are able to maintain the standard of living by the minimum amount fixed by the competent authority, they feel contented and work, more efficiently.
- Inefficient Employers are eliminated. If an entrepreneur is paying low wages to the workers because he is not able to manufacture the goods al the competitive price, then he may have to close down his concem when the minimum wage is fixed. If such inefficient employers are eliminated from the society, it won't materially affect the total production of the community. So earlier they leave, the better it is.
- The gap between the rich and the poor is reduced i.e. it reduces income inequality.
- It increases labour efficiency, which helps to increase the general output.
- It creates industrial peace by minimizing trade unions activities.
- It reduces the relative geographical and industrial wage differences.
- It increases the purchasing power of the workers, which lead to arise in the aggregate demand.
Disadvantages of Minimum Wage
- Decrease in Efficiency. When a government fixes a minimum wage for all the workers then that amount is often considered to be the maximum by the entrepreneurs. If a worker is very efficient, he will not be paid higher wages than fixed by government. It will thus reduce the incentive of the worker and thereby decreasing his efficiency.
- Fixation of Minimum, Wages a Difficult Affair. It is very difficult to fix a minimum wage for all the workers at different places in a country. This is because costs vary from place to place. For instance it is higher in towns than villages. So at these places, the minimum wages should be fixed higher than at other places. If a higher minimum wage is fixed at one place, then it may not suit the other employers.
- Difficulty in Enforcement. If a minimum wage is fixed, then difficulties may arise in its enforcement. If the labour is unemployed, they may agree to work at a wage lower than that fixed by the government.
- Disorganizations in Business. If a minimum wage is fixed for some trades only and not on the national scale, then there will be flight of capital from the former to the later. This will cause cisorganization in the whole business.
- It increases the cost of production leading to high prices for goods and services.
- It leads to unemployment for the lowly paid workers i.e. it makes the employers to have preference for high wage earners i.e. those who were already earning above the minimum.
- This leads to the dismissal of workers who were initially earning below the minimum wage: ;
- It makes labour more expensive relative to capital assets. This may lead to adoption of capital intensive methods of production that pushes labour outlet job.
- The reduction in employment may reduce the purchasing power on the aggregate demand which consequently discourages production.
- It leads to rural urban migration as the workers may wish to enjoy the high wages in the urban formal sector.
- It may cause an inflationary problem due to rising prices from rising costs.
Reasons for wage differentials
- Differences in skills (Level of education) A highly trained and skilled person is paid a higher wage than one with lower level of education and training.
- Variations in living costs: People who work in areas where the cost of living is very low are paid less than those who work in areas where the cost of living is high.
- Differences in expertise:- Senior workers, because of their experience, are paid higher wages than junior and inexperienced workers.
- Differences in individual bargaining Power. In case of the negotiable wage system, the individual with strong bargaining power will be paid a higher wage than those with weak bargaining power.
- Variations in the nature of the job: Some jobs are more risky than others. Those who work in the risky jobs are paid higher wages than those who work in the less risky ones.
- Differences in trade union strength:- Those who belong to powerful and strong trade unions are paid higher wages than those who belong to weaker trade unions.
- Differences in employer's ability and willingness to pay: An employer pays wage according to his ability and willingness to pay. If a worker works with the employer who has the ability to pay a higher wage and IS willing to do so, then the worker will be paid a higher wage and vice-versa.
- Differences in people's ability to do work:- In case of piece rate, those who are more hard working earn a higher wage than the lazy ones and vice versa.
- Discrimination in the labour market:- Sometimes wages are different even for the same work done due to the discrimination in the labour market based on sex, religion, tribe, etc.
- Difference in talents or natural gift:- People are talented in special fields earn more wages than those who are less talented e.g. footballers.
- Difference in labour elasticity supply:- Where the supply of labour is inelastic in an industry, labour will be paid a higher wage than where labour supply is elastic.
- Difference in duration worked:- Under the time rate system, the employees who work longer durations are paid higher wages than those who work shorter durations.
- Unmatching wage policy:- The government may set a wage for its workers which may be different from the wage paid by the private sector and NGOs.