The Minimum Wage Dilemma Now that you have learned about the labor market and wage determination, think about the implications of minimum wage laws. Then, post a response to the following: 1. Do you...

The Minimum Wage Dilemma
Now that you have learned about the labor market and wage determination, think about the
implications of minimum wage laws. Then, post a response to the following:
1. Do you think the minimum wage law is an economically efficient means of reducing
household poverty? Why or why not?
2. What are some other ways that might be more efficient for this purpose? Suggest two or three
viable measures.
Union Actions and the Labor Market
Unions exert a powerful influence on the labor market, affecting both demand and supply, and
thereby the wage rate. After reading about the influence of labor unions, post a response to the
following:
1. From an economic perspective, are unions efficient or otherwise? Give reasons for your
answer.
2. What objectives do unions serve? Are there other, more economically efficient, methods to
achieve these objectives? What might those methods be?
Solution:
The Minimum Wage Dilemma:
1) Minimum wage law is the part of law that prohibits employers from hiring employees or
laborers for less than a given hourly, daily or monthly wage. Thus if a minimum wage
law is to be effective, then the minimum wage must be set above the market equili
ium
wage. But an effective minimum wage produces unemployment. This is shown in the
following diagram:

In the above diagram, we measure the quantity of labor in horizontal axis and wage rate
on vertical axis. Labor demand and labor supply curves are D and S respectively. These
two curves intersect at point-E. Thus point-E is the equili
ium point, where at W* wage
ate Ob amount of labors are employed.
Now, without minimum wage law, employment is Ob. If the minimum wage rate is W-
ar, then at this wage rate the employment is Oa. However at higher wage rate W-bar, the
quantity of labor supplied will be larger, which is Oc. This is due to the reason that more
people will enter into the work force and those already working will want to work more
hours. Thus,
ab = Decline in employment hours,
c = Increase in quantity of labor supplied
and ac = (ab + bc) = Unemployment in hours.
Thus, the observed unemployment „ac‟ is higher than the reduction in employment „ab‟,
induced by minimum wage law.
Now, one of the major objectives of minimum wage law is to promote more equitable
income distribution by raising the wages of low wage earners. But, due to minimum wage
law, at higher wage rate, the employers will be willing to hire skilled labors rather than
the unskilled workers for better outcome in the process of production. Hence, as the
employers substitute unskilled labors by skilled ones, the unskilled workers lose their
jobs. This creates unemployment in the economy. Through this way of generating
unemployment, poverty emerges into the economy rather to decline.
So, it can be said that minimum wage law is not an economically efficient means of
educing the household poverty.
2) There are some other ways that might be more efficient for the purpose of reducing
household poverty. One is to provide higher overtime payment rather to implement the
minimum wage law....