by Algy Moncrieff

Created on: July 21, 2009

Whilst it is easy to look at the minimum wage and see nothing except a ridiculously low wage that does not really allow for an acceptable standard of living, it would be wise to take a step back and see how the problem of what minimum wage to set develops when viewed from the direction of some basic economic analysis. Economists pride themselves on their rationality; some people view this as callousness, but it is often worthwhile to view a problem from a detached perspective whether or not you finally conclude that this is the right answer to the problem.

Minimum wage laws are introduced to protect workers from exploitation, albeit to a limited degree, because it is generally agreed that there are few parts of the country where the minimum wage will support one person, let alone a family. Nevertheless, with the law in place some people get more money than they otherwise would, and these are usually the people who really need it (of course it could be a rich middle class kid's weekend job, but with no method to arbitrate between cases we'll have to let that lie).

Delving a little deeper we can find some further benefits of minimum wage laws. One of these is that it helps workers to avoid a so-called 'poverty trap'. A poverty trap occurs where it is not worth a worker's while to get a job because the wage they would be paid is not higher than, or not sufficiently different from, their benefit payments, and as such they do not get a job. If the minimum wage is higher it is more likely that it will provide a better standard of living than unemployment benefits from the state.

Here we hit the first snag though. First, a simple economic concept needs introducing: equilibrium. Equilibrium is found when the supply of labour (people wanting jobs) is equal to the demand for labour (firms wanting to hire workers). If the wage is too high then you have more supply than demand - if it is too low then you have greater demand than supply. Normally wages will shift to equilibrate the market (this is the classical theory and doesn't perfectly fit the world, but for now will do). However, putting a minimum wage in place will either have no effect (if it is below the equilibrium wage anyway then people may as well ignore it), or more likely it will be above equilibrium. Unfortunately this means that there are immediately more people wanting jobs than there are jobs available.

We therefore have a trade off between people in work having a better standard of living

• 1
• 2
• Next Page >>