Monday, May 28, 2007

Minimum Wages Essays

The Minimum Wage is a popular topic in exams. It is a good example of how theory can be applied to the real world.

Does A Minimum Wage help Reduce Poverty?

A minimum wage increases the wages of the low paid, but does it actually reduce relative poverty? This is a matter of debate because the effects of a minimum wage may not be felt by the poorest.

How a minimum wage reduces poverty
  1. Increases wages of lowest pay. This reduces relative poverty of the low paid. (It also perhaps, reduces need for goverment benefits, such as, income support
  2. Counteracts Monopsony Power. In some cases a minimum wage can actually reduce unemployment. See diagram
Why a Minimum Wage May not Reduce Poverty

  1. The poorest do not work at all. The poorest are on government benefits; therefore, they do not benefit from a minimum wage.
  2. Many workers receiving the minimum wage are second income earners or students. Therefore, the benefits of a minimum wage can often accrue to middle class families.
  3. Minimum wages can lead to a fall in employment. Unemployment can be the biggest cause of poverty. See: Disadvantages of Minimum wages
  4. May increase Black Market Economy. Minimum wage legislation may encourage people to work on the black market, and therefore, avoid all government legislation.
  5. Evidence from America suggest effect is limited. See this paper by James Sherk: Raising minimum wage does not reduce poverty
"The obvious policy implication is that minimum wage laws cannot be justified as a poverty reducing device."

- Dr R.Vedder and Dr E. Galloway [1]


See Essay: Does a Minimum Wage Reduce Poverty?

Does A Minimum Wage Cause Unemployment?



For example, the classical analysis of minimum wages suggests that a minimum wage above the equilibrium will cause unemployment.

However, in practice, we see that increasing the National Minimum Wage may not lead to unemployment. For example, in the UK the minimum wage has increased from £3.30 in 1997 to £5.35; however, during this period unemployment has fallen.

There are various economic reasons to explain why this might occur. The most convincing reasons in the UK include:

  • Economic Growth
  • Monopsony Power of Employers
  • Increasing Productivity

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