Economics of Minimum Wage
Economists are split over the merits of the minimum wage. There are some of the most convincing arguments for and against the minimum wage. This issue has become more relevant in the wake of on going debate over the wage system under MNREGA in India. Most economists believe that minimum wage laws cause unnecessary hardship for the very people they are supposed to help. The reason is simple: although minimum wage laws can set wages, it cannot guarantee jobs. In practice it often pushes price low-skilled workers out of the labor market. Employers typically are not willing to pay a worker more than the value of the additional product that he/she produces. This means that an unskilled youth who produces Rs.250/- w
orth of goods in an hour will have a very difficult time finding a job if he must, by law, be paid Rs.300/- an hour. As Princeton economist David F. Bradford wrote, “The minimum wage law can be described as saying to the potential worker: ‘Unless you can find a job paying at least the minimum wage, you may not accept employment.’
The minimum wage is a hot-button issue for politicians and economists. Every time an amendment comes before the law makers to raise the minimum wage, advocates and critics pull out some convincing arguments to win over public opinion. The most common argument in support of the minimum wage is that it protects the workers at the lowest rung of the socio - economic ladder. These workers, many of whom represent marginalized groups (women, minorities, youth workers, the disabled, and so on), simply don’t have the bargaining power to fight for a minimum living wage without government intervention.
Opponents of the minimum wage claim that a fixed minimum wage actually hurts the same low-rung workers it vows to protect. The minimum wage, they say, is an artificial, government-imposed value for an individual worker. The real value of a worker should be decided in the open market. For example, if a young worker is applying for his first job as a machinist at a factory, the owner of the factory knows that the worker won’t produce as many widgets as a more experienced employee. For the factory owner, this employee will clearly bring in less money. Therefore, he deserves a lower hourly pay. Opponents of the minimum wage argue that if the factory owner is forced to pay that young worker an artificially high minimum wage, then he will choose not to hire the worker, because it won’t make financial sense. So, in this scenario, instead of working for less than minimum wage until he gets more experience, the young worker is now unemployed.
Economists on both sides of the issue hold up study after study proving that the minimum wage either does or doesn’t contribute to a rise in unemployment, so that issue remains unresolved. For a country like India the issue got more complicated due to lack of data of the prevailing wages in the rural areas. There is a need for debate and discussions among the policy makers and other stakeholders on this issue of prevailing minimum wages in the country.
orth of goods in an hour will have a very difficult time finding a job if he must, by law, be paid Rs.300/- an hour. As Princeton economist David F. Bradford wrote, “The minimum wage law can be described as saying to the potential worker: ‘Unless you can find a job paying at least the minimum wage, you may not accept employment.’The minimum wage is a hot-button issue for politicians and economists. Every time an amendment comes before the law makers to raise the minimum wage, advocates and critics pull out some convincing arguments to win over public opinion. The most common argument in support of the minimum wage is that it protects the workers at the lowest rung of the socio - economic ladder. These workers, many of whom represent marginalized groups (women, minorities, youth workers, the disabled, and so on), simply don’t have the bargaining power to fight for a minimum living wage without government intervention.
Opponents of the minimum wage claim that a fixed minimum wage actually hurts the same low-rung workers it vows to protect. The minimum wage, they say, is an artificial, government-imposed value for an individual worker. The real value of a worker should be decided in the open market. For example, if a young worker is applying for his first job as a machinist at a factory, the owner of the factory knows that the worker won’t produce as many widgets as a more experienced employee. For the factory owner, this employee will clearly bring in less money. Therefore, he deserves a lower hourly pay. Opponents of the minimum wage argue that if the factory owner is forced to pay that young worker an artificially high minimum wage, then he will choose not to hire the worker, because it won’t make financial sense. So, in this scenario, instead of working for less than minimum wage until he gets more experience, the young worker is now unemployed.
Economists on both sides of the issue hold up study after study proving that the minimum wage either does or doesn’t contribute to a rise in unemployment, so that issue remains unresolved. For a country like India the issue got more complicated due to lack of data of the prevailing wages in the rural areas. There is a need for debate and discussions among the policy makers and other stakeholders on this issue of prevailing minimum wages in the country.
Asmi Raza
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