Question: Discuss the benefits of a minimum wage.
The minimum wage is the legal minimum hourly rate of pay.
The minimum wage is the legal minimum hourly rate of pay. The government may impose a minimum wage to raise income and alleviate poverty. A minimum wage causes wages to rise so the quantity demanded of labour falls and the quantity supplied of labour rises. Because Ls > Ld, there is excess labour supply. Minimum wages only benefit Ld amount of workers, Ls – Ld workers are willing and able to work at the minimum wage but are involuntarily unemployed.
One benefit of a minimum wage policy is higher wages. Workers will receive a higher wage, and can therefore buy more goods and services, so living standards rise. Although, the effect on living standards depends on how high the minimum wage is set. A minimum wage set slightly above equilibrium will not increase wages that much. A minimum wage set below equilibrium will not have any affect.
Another benefit may be increased labour productivity. Workers may be incentivised to become more productive if they are paid a higher wage. On the other hand, this could also lead to lower quality goods being produced. Workers may be encouraged to work less hard because they are guaranteed a high wage, so the quality of the produced good falls.
Lastly, a minimum wage could help reduce inequality. A higher wage for the lowest paid workers means poverty falls and income inequality decreases. However, it could also lead to increased unemployment. Unemployment may rise because wages are too high. In the diagram above, Ls – Ld workers are willing and able to work at the minimum wage but are involuntarily unemployed. Also, firms may be encouraged to hire illegal workers so as to avoid paying the higher minimum wage. So inequality may actually rise.