The idea of minimum wage is a concept familiar to many, especially if you think of a student working part-time to radicalize their student debt figure and bring it to sustainable levels.
In this context, being paid a wage that qualifies the lowest legal standard assigned by the government, to prevent work exploitation does mean righteousness and justifies the existence of the concept.
But then again- we’re looking at the wrong standards for justifying the same.
The international monetary fund (IMF) underlines the objective of minimum wage as ” boosting incomes and improving the welfare of workers at the low end of the ladder, while also reducing inequality and promoting social inclusiveness”
In the case of the student, the practice is justified on a “moral, social and economic basis” (IMF 2019). But it denies the fulfillment of the other criteria it seeks to replenish, as it has been known to disrupt the natural demand for labor in the market.
Let’s start to understand this by decompartmentalization.
Any market functions because there is a demand for a good or service and based on what the demand indicates, ideally supply is made so that an equilibrium is formed i.e quantity demanded equals quantity supplied. This occurs naturally in the market, wherein the price for the good or service is decided based on the demand- as in how much people are willing to pay to acquire their goods or services.
Now at any point in time, when the government introduces a policy such as the minimum wage, an alteration is made to the natural flow of the market. This is called government intervention, and it is because the minimum wage policy fixes a price by legislation instead of relying on the natural demand of the market that the policy intervenes with the naturally formed equilibrium.
This can be better understood by an economics diagram.
Officially, the minimum wage policy comes under a form of intervention known as a price floor- because essentially the government places a minimum floor on the price of providing labor (a minimum payable amount) in the form of wages.
In the graph, the x-axis represents the quantity of labor demanded by employers, and the y-axis is the price/ wages provided for the labor provided. S( in blue) represents a supply of labor by workers and D(in red) represents the demand for labor by employers- their intersection leading to the all-natural equilibrium we’ve been talking about- giving us
quantity of labor q* at the price of p*.
When a price floor- in this case in the form of minimum wage is set by the government, it’s essentially a price that is above the market equilibrium discussed above for reasons of enhancing incomes and boosting the lower workforce as aforementioned. Looking at the Y-axis, this increase in price by direct legislation (meaning a government command- no questions!) is the difference between P floor and p*- P floor being the new price set by the government. A black and white understanding of this would be that the imposition of a price floor above the equilibrium guarantees a higher wage- which is what we want…except it’s easy to forget that the market has a mind of its own and can’t be completely controlled by the government.
Let’s see an example
Flashback to when any of you were buying commodity-say onions. An increase in price always meant that you felt less compelled to purchase the same. But knowing that their onions are less likely to fetch any sum due to this decreased demand, producers are signaled naturally to decrease the price or risk dealing with an unsold surplus that’s probably going to rot away since onions are perishables. This slowly paces downward pressure on price till it reaches a level that actually indicates the actual demand for onions in the market.
Similarly, when the prices of onions are less, an increase in demand will take place. This signals the producers to increase the price since they know that there is sufficient and even surplus demand in the market, ensuring a fatter paycheck for them while at the same time managing over-the-top demand for onions.
But in the case of minimum wage, the price floor is an unwavering check on how much can be paid. It doesn’t change because it’s the product of government legislation meaning it doesn’t respond to the demand in the market and persists at P floor in the diagram instead of sloping towards the equilibrium.
The impacts on stakeholders
This persistence of high wages on P floor- higher than the ones that employers were used to paying before the imposition of minimum wage-p*- reduces their demand for labor settling from q* to QP. Less labor means that there is less productivity, meaning a reduction in the quantity of the good or service being provided by the fraction of q*-qp. This reduces the burden of paying wages to the workers but producers are still impacted by the reduction in their productivity. Consumers of the commodities that the workers are producing take a hit as well- since it’s costlier to produce the commodity due to an increase in wages, it’s costlier to buy the product on the day to day basis.
And are employers likely to stand by to watch a government policy vanquishing their profits?
Simple answer -no! The minimum wage policy does reduce demand for laborers from employers, but workers themselves are incentivized to supply more labor because they’ll now be working for a higher wage. This creates a disproportion in the quantity demanded and the quantity supplied and ruptures the natural flow of the market as there is now a surplus of labor in the market but only a limited demand for the same.
This means only a fraction of workers will benefit from minimum wage, a greater fraction will be fired and those unemployed will persist in that condition. In short, the objective of minimum wage gets annihilated and we’re not even done with unraveling the other backlashes of this concept.
Most workers on “the lower end of the ladders” can’t find it sustainable to be unemployed for longer periods of time. For the sake of making some provision for their daily sustenance, they’re ready to work at any wage that’s available in the market.
And it’s exactly this unfortunate plight that leads to the flourishing of the black market- workers resort to working for a wage that’s lower than the legal minimum, as it tops being unemployed in any case. This is how employers end up with cheap labor, reducing their costs of production and giving them hefty profits.
But officially quantity being produced still remains less, consumers of products still end up paying high prices and a large fraction of the workforce remains oppressed under poor working conditions. It is in this manner that the government’s policy fails to achieve the very criteria that it set out to fulfill in the first place.
So the next question is- why does the government impose minimum wage if it’s a policy that clearly fails to live up to its expectations?
The answer: is to conform to political pressure or even use the policy to convince the unknowing local people to vote for it and guarantee better work conditions.
What should be done instead is to provide awareness of the policy’s shortcomings in order to eliminate the political pressure to impose a policy that provides little benefit.
It’s a matter of deciding an alternative policy to resolve the objectives of the minimum wage.
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