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Minimum wages are rising around the world

Key terms

Price floor - minimum price imposed by the government at a level above the equilibrium price in a free market, resulting in surplus.

Surplus - excess supply, QS-QD

Minimum wage - price floor for labor



The minimum wage is currently introduced in 192 countries around the world. Governments introduce it in order to ensure that low-skilled workers can earn a wage high enough to secure them with access to basic goods and services. Still it is a topic for debate as some people claim that it is the main reason for poverty, some that it is a way of eliminating it. 


New year came with several countries raising the national minimum wage.


  • Turkey raises monthly minimum wage by 49% 

  • Colombia to hike minimum wage by 12%

  • Ecuador raises monthly minimum wage to $460 

  • The minimum wages in Poland are increased from PLN22.80 to PLN27.70 per hour and PLN3,490.00 to PLN4,242.00 per month

  • Portugal raises minimum wage from €760.00 to €820.00 per month and from €10,640.00 to €11,480.00 per year


Let’s find out how it will affect stakeholders and try to answer the main concerning question “Is implementing minimum wage worth it?”.


 

Graph 1: Minimum wage in Portugal in 2023


According to graph 1, initially market equilibrium was at We and Qe. The government of Portugal introduced a new minimum wage Wm, equal to €760.00, which is higher and located above equilibrium Pe. Implementation of minimum wage leads to decrease in QD (law of demand) and increase in QS (law of supply), resulting in labor surplus or unemployment: more people want to work for the higher wage, but employers can afford to hire fewer people, whom they can pay minimum wage. In addition, there is a deadweight loss, which indicates allocative inefficiency.


  • Producers can be better off since minimum wage increase means increased income of consumers that shifts demand curve to the right and leads to increase in firms’ revenues as prices and quantity increases. But the producers might lose as they must pay minimum wages, which increases cost of production, shifting supply to the left, increasing prices and decreasing quantity, which might reduce revenues, depending on PES and PED.

  • Workers might benefit from higher wages but lose from decreased production and staff cuts, unemployment, due to inability of firms to pay all workers the minimum wage.

  • Consumers might be negatively affected by decreased production and increased prices.

  • Government is neither worse off nor better off, but it can gain political popularity for caring about people or lose it for unemployment and negative impact on firms.

  • Society overall loses, which can be seen from the welfare loss that resulted from inefficient allocation of resources: unemployment. Overall, minimum wage has both positive and negative effects on stakeholders.


 

The minimum wage has several advantages and disadvantages:

Advantages

  • Living standards increase: higher income increases customers purchasing power

  • Government spending on helping low income households decreases, as people have higher wages

  • Increased efficiency: higher wages and possibility of being replaced by increased amount if people who want to work are good motivation to work

  • Economic growth: higher incomes lead to increased consumption and consequently, increased GDP

Disadvantages

  • It might have no impact on living standards: income increases but so do prices, and thus living conditions might stay the same or increase/decrease depending on difference between percentage change in prices and wages

  • Increased inflation due to increase in prices might erode purchasing power of the increased minimum wage

  • Unemployment and high competition in the labor market


 

In conclusion, the implementation of a minimum wage has both positive and negative effects on various stakeholders, as evidenced by recent increases in several countries. While the intention behind minimum wage laws is often to ensure fair compensation and improve the living standards of low-skilled workers, the reality is more complex. The positive aspects include the potential for an increase in living standards, which may reduce the need for government spending on welfare programs for low-income households, a motivational factor for employees, potentially leading to increased efficiency in the workforce and higher disposable income can contribute to economic growth. However, the negative consequences in the form of unemployment or labor surplus, leading to an inefficient allocation of resources and a deadweight loss, as well as potential losses for businesses, customers and economy are also important for policy evaluation. 


In my opinion, living standards and efficiency of workers are the main factors affecting economic development and growth, thus minimum wage should be implemented. However, it should be implemented with careful consideration of the minimum wage amount, which should be reasonable, and economic situation in the country (implementing minimum wage in times of recession and hunger might result in deaths and not in the increased efficiency)

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