AContemporary Issue: Minimum Wage
AContemporary Issue: Minimum Wage
Aminimum wage law is a contemporary issue that has attracted differentcamps where each camp seeks to achieve either the public or theprivate good at the end of the debate. Different stakeholders presenttheir arguments based on different perspectives. Minimum wage isdefined as the minimum amount of money that a worker is entitled perhour (U.S. Department of Labor, 2015). The minimum rate is set by thegovernment with the objective protecting unskilled and semi-skilledworkers from the negative effects of inflation. This paper willanalyze the issue of minimum wage in the contexts of the neoclassicalperspective, mixed economic perspective, and the radical economicperspective.
Althoughthe issue of the minimum wage has been controversial for many years,it has attracted a hot debate in the recent years following theincrease in the economic hardships that affect employees. However,different participants in the debate on whether states should haveminimum wage laws often seek to advance their interests when airingtheir views (U.S. Department of Labor, 2015). The tendency ofdifferent stakeholders to pursue their interests serves as the majorsource of tension between those who wish to achieve their privateinterests and those who approach the debate with the intention ofattaining the public good out of the debate. For example, politicianswho are the key policy makers on national matters are interested inresults that boost the sustainability of the national economy whileindividual employees and union leaders seek to attain wages that willenhance their quality of life.
Theneoclassical economic perspective holds that the output, prices, andincome distribution should be determined by the market forces.Scholars who support this view believe that any state interventionincreases inefficiencies in the market (Marchal, 2015). Thestakeholders who take part in the debate on the issue of minimum wagelaws with the neoclassical perspective hold that market forces havethe capacity to create full employment by eliminating surpluses andshortages (Marchal, 2015). Supporters of this perspective considerthe minimum wage laws as exogenous shocks that distort prices in themarket, leading to unnecessary inefficiencies. The role of marketforces is to ensure that all factors of production (including labor)are only paid the amount that they are worth. Consequently, pricefloors that prevent employers from adjusting wages downwards coupledwith other types of obstacles (such as the existence of strong laborunions and social protection institutions) cause unemployment andlower the overall wellbeing by interfering market-determinedprocesses (Pally, 2004).
Theneoclassical perspective is founded on the assumption that wages willincrease in any class of workers whose labor is in high demand anddecline for the class whose labor is in low demand. Although thegovernment finds it difficult to ignore the concerns the lowly paidemployees, especially the semi-skilled and unskilled workers, optingfor the minimum wage law is an ineffective approach that reducesefficiency in the national economy. Proponents of the neoclassicalperspective would consider such a move to have two major errors.First, the minimum wage laws assign responsibilities to groups andindividuals (Marchal, 2015). The new actors (including employers) useprovisions of the law to pursue their interest while distorting theequilibrium that can only be established by the market forces.Secondly, it is impractical to adjust demand and supply in the labormarket irrespective of how powerful one is. Therefore, any attemptsto formulate laws that will dictate the wage levels will result ineither surpluses or shortages in the labor market.
Adecision made by policy makers to increases wages lead to job lossesin the same way that low productivity in the market lenders someworkers jobless. This is because forcing wages to go up above theequilibrium (as shown in Figure 1) that is determined by the marketforces leads to excess supply of labor, which lenders some peopleeither underemployed or totally unemployed.
Figure1: Implications of the minimum wage laws on equilibrium
Afterraising the minimum wage of unskilled as well as the semi-skilledworkers, employees who have been earning wages that correspond to thecurrent minimum wages will stand demand for a wage increase, whichdistorts the entire labor market.
Themixed economic perspective holds that the government is mandated tointervene in different sector of the atonal economy with theobjective of compensating for the perceived failures of the market.This perspective is founded on the assumption that the interventionof the government can restore growth, distribution, and efficiency inthe market whenever the market forces fail to do so (Northrup, 2013).A mixed economy allows prices to respond to demand and supply in aflexible manner. Compensations brought about by the government’sinterventions are designed to ensure that business is able to makeintense use of available resources and consider financialconstraints, instead of quotas to make decisions. Applying thisconcept to the issue of the minimum wage laws, wages for all workers,both skilled and unskilled, should be determined by demand andsupply, but the government can develop policies that alter thedistribution of resources in order to influence demand and supply,thus influencing wage levels indirectly. This implies that thegovernment can only function by controlling taxes, expenditure,social insurance, barriers to entry into the market, and allocationof investment.
Amixed economy may also be regarded as an interventionism approachbecause it allows policy makers to formulate some policies that willeconomic errors that result from collectivism and capitalism. This isachieved by regulating innovativeness ad efficiency in the ownershipof the means of production by the private sector (Ikenda, 2015). Theuse of a mixed economy approach can help the stakeholders in thelabor market avoid demerits and take advantage of both the commandeconomy where the government control all aspects of the nationaleconomy and unplanned economy where the national economy is left tothe forces of demand and supply. Therefore, the mixed economicperspective is a middle ground that gives the policy makers anopportunity to regulate wages without interfering with the laborprice equilibrium that is established by the market forces.
Theperspective of radical economy holds that, if the market is left toitself, it will destroy the environment, wear out and cast out thehuman labor, and eventually create mass unemployment through itshighly competitive order (Gonic, 2015). This implies that proponentsof the radical economy believe that market forces can create asociety that is highly polarized in terms of life chances andincomes. Applying this concept to the idea of the minimum wage laws,radial economists would support the notion of having strictgovernment’s interventions in setting minimum wages with theperceived objective of protecting the national economy fromdistortions that are caused by the market forces.
Thestakeholders who subscribe to the radical approach will always adoptrelentless measures in an effort to find a solution to the issue oflow wages that are perceived to be below the living wage levels.These economists do not give the forces of demand and supply a chanceto restore balance in the market, but they instead rely onindividuals and groups of people to develop radical solutions, suchas the formulation of the minimum wage laws (Gonic, 2015). Thisconcept is popular among politicians who take advantage of situationsto develop their career by creating a perception that they can offersolutions in difficult times.
Minimumwage laws is a currently a controversial issue that has attractedopinions of different stakeholders. Different people apply differentperspectives to present their arguments. Supporters of theneoclassical perspective hold that labor prices should be determinedby the forces of supply and demand. This perspective is likely to besupported by employers who believe that the government should not setthe minimum wages. Supporters of the mixed economic perspective holdthat the government should regulate wages indirectly by controllingits expenditure and taxes in a manger that will influence the supplyand demand for labor. Therefore, this category of economists opposesthe formulation of the minimum wage laws. Lastly, proponents of theradical economic perspective believe that the government shoulddevelop the minimum wage laws since leaving the levels of wage to themarket forces will destroy the labor market and culminate in massunemployment. This perspective may be supported by employees who needthe government’s protection from capitalist employers.
Gonic,C. (2015). Radical economics. HistoricalCanada.Retrieved October 19, 2015, fromhttp://www.thecanadianencyclopedia.ca/en/article/radical-economics/
Ikenda,S. (2015). The incoherence of the mixed economy. FEE.Retrieved October 19, 2015, fromhttp://fee.org/freeman/the-incoherence-of-the-mixed-economy/
Marchal,P. (2015). Advantagesand disadvantages of the minimum wages. Comparing the neoclassicaland post-Keynesian perspectives.St. Gallen: University of St. Gallen.
Northrup,C. (2013). TheAmerican economy: Essays and primary source documents.Santa Barbara: ABC-Clio.
Pally,I. (2004). FromKeynesianism to Neo-liberalism: Shifting Paradigms in Economics.London, England: Pluto Press.
U.S.Department of Labor (2015). Wageand hour division: Minimum wage.Washington, DC: U.S. Department of Labor.