Minimum Wage Solution Failure Of Labour Market Economics Essay

Harmonizing to the International Labour Organisation ( ILO ) , employment covers any work or services rendered in exchange for pay, salary, net income or household addition. This besides includes the production of goods for one ‘s ain ingestions.

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On the other manus, a individual is considered unemployed if he or she is presently without work though he or she is available for work and is actively seeking for a occupation. Economists and politicians are more concern with the degree of unemployment,

Harmonizing the ILO definition, entire labour population is the entire figure of people in a state between 15 and 64 of age actively seek for occupation.

Why is employment of import?

Employment degree has been used as one of the cardinal indexs reflecting assorted economic and societal conditions such as economic growing, rising prices and income distribution etc. On a personal degree, employment is of import because it enables a individual without agencies of other income to gain the wage required to back up him and his household.

In general, if a state is sing high employment degree, for illustration full employment, it is expected to see high economic growing rate. From the society point of position, a state with high degree of employment tends to be more stable than the 1 with high degree of unemployment. There would be more offense rates and sometime even public violences.

Hence employment is of import for an person as it is the cardinal manner where an person can gain his support and back up his household. When an person lose his employment and unable to back up his household and have negative impact on him psychologically. See diagram 1 for the relationship of male suicide rate and unemployment rate in Japan from 1953 to 2003.

Diagram 1

From economic point of position, employment is important to uninterrupted economic growing and the fruits of economic growing are shared by the workers ( i.e. income equality ) . Finally, from societal and political point of position, employment is highly an of import factor to guarantee satisfaction of the population, cut down offense rate and guarantee stableness.

The undermentioned charts show the relationships between unemployment rate and robber rates and slaying rates in Detroit in US from 1970 to 2005.

Diagram 2

Diagram 3

Beginning: David Martin, Ph.D. , Wayne State University Center for Urban Studies.

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From the first chart, we see a close relationship between the robber rate and unemployment rate. As workers lose their occupations, they might decide to take portion in illegal activities to gain money in order to feed their households.

In the 2nd chart, we besides see a similar tendency where slaying rate moves up and down in line with the unemployment rate except during the period from 1984 to 1990 where there was a immense addition in drugs trafficking which is described as an epidemic.

How is employment degree determined?

Merely like any other economic goods, the labor market is driven by both the demand side and the supply side. The demand of the labor is the aggregative demand for workers and employees by the endeavors whereas the supply of labor refers to the economically actively labour population.

In short tally, both the demand and supply of labor can be expressed as maps of rewards, given other factors such as economic rhythms, engineering etc remains changeless.

It is unsurprising that the demand curve for labor is downward inclining. When the pay degree is high, the employers can merely to afford fewer workers, but as the pay degree beads, they can afford to use more workers.

On the other manus, the supply curve for labor is upward inclining. When the pay degree is low, fewer workers are willing to work, nevertheless, as the pay degree addition, more workers, e.g. the homemakers, the retired and the young person may be lured to fall in the labour market in parttime capacity.

Diagram 4

Classical and Keynesians economic experts believe that labour market is a perfect competitory market and the market forces ( viz. the demand and supply ) will find the equilibrium pay and employment degree.

Diagram 5

Using this analysis, when the authorities imposes a lower limit pay which is higher than the equilibrium pay, so employers could merely afford to use Nd workers whereas at the minimal pay degree, Ns workers are willing to work. There is an extra supply of workers ( i.e. Ns – Neodymium ) .

With the lower limit pay, Nd workers will be better off gaining the lower limit pay which is higher than the equilibrium pay. However, N – Nd workers will now be out of occupation.

Ns – Nd workers who would non see working at the initial equilibrium pay degree will now be considered as unemployed.

Hence, base on this analysis, the negative consequence of the minimal pay is addition in unemployment degree. Because of this, there is a batch of contention when the legislative council argument about the minimal pay measure.

What are the defects of the demand-supply theoretical account of the labor market?

The theoretical account implicitly assumed that the labor market is competitory and all labors are homogeneous. No endeavor or house have power to impact the market. Unfortunately, these conditions do non keep in the existent market. First and first, labors are non homogeneous, they have different accomplishment degree, experience, proficiency and efficiency. Second the employers in general have more bargaining power than employee because labor market is segmented by accomplishment, experience and location. Hence, alternatively of one homogeneous labor market, there are different demand for labour with different accomplishment, instruction degree and experience.

Diagram 6 shows unemployment rate of New Zealand from 1986 to 2009. The ruddy line shows the aggregative unemployment rate in New Zealand whereas the bluish line shows the unemployment rate of young person between 15 to 19 of age. It is amazing to happen that the young person unemployment is about ( four times ) than the grownup unemployment ( the green line ) . As new entrant to the labor market, the young person deficiency experience and instruction and therefore hold really weak bargaining power with the employers. If they want to acquire a occupation, they have to accept a pay that could be significantly lower than the market equilibrium pay.

Diagram 6: Unemployment and Youth Unemployment

Furthermore, employers might besides maintain the pay low by favoritism. They may pay different workers with the same occupation degree otherwise. Some workers might be willing to accept lower wage due to sex difference, age, nationality, race, physically disablement or even unwanted past individual records ( e.g. ex-convicts ) . Due to these exclusions, the employers are able to use more workers without traveling up the “ supply ” curve. As the demand-supply theoretical account failed to explicate the consequence of dickering power on employment and pay degree. Hence, its decision about the consequence lower limit pay on employment is non conclusive.

Fourthly, the demand and supply theoretical account assumes the workers productiveness remains unchanged with alteration in pay and working conditions. However, empirical surveies really show that the demand curve ( i.e. the fringy productiveness curve ) might be shift upwards with the addition in pay degree and working conditions and frailty versa.

Hence, with all these imperfect market conditions, workers with low dickering power, viz. the low educated, low accomplishment set, new immigrants and the young person tends to work “ low pay ” or stay unemployed.

What is the aim of the lower limit pay?

Minimal pay by definition is the hourly, daily, hebdomadal or monthly pay lawfully set by the authorities. It acts as the floor for labor costs to rectify the imperfect market conditions which exploits those workers with low dickering power. It is to forestall the “ on the job poorness ” .

This is similar to the instance where authorities set up statute laws to modulate the operators of industry classified as natural monopolies or to rectify anti-competition patterns.

The aim of the authorities to present minimal pay is to rectify the market failure in the low-pay labor market sector. By puting an suitably minimal pay ideally equal to the fringy productiveness of labor could increase both rewards and employment. T

The minimal pay is to guarantee workers are paid at a sensible and “ market efficient ” degree where they could prolong their supports.

Impact of minimal pay on employment in the low-pay labor market section?

Empirical surveies show that there is no important impact of minimal pay on employment. There could be a figure of grounds.

First, demand for labor is the derived demand. If the demand for the merchandise the employees produce is non monetary value sensitive. ( i.e. extremely inelastic ) , so even if the employers are force to increase rewards ; the employers can go through on the addition in pay to consumers. Since the demand for the merchandise is inelastic, consumers would go on to purchase the merchandise at the higher monetary value and so the employers are non forced to put off workers.

Second, higher rewards might besides cut down turnover and therefore preparation costs. The extra costs incur by the higher rewards might be offset by the preparation costs incur by high turnover and therefore overall impact to the costs construction of the concern is minimum.

Can the “ mark group ” reap the full benefit from the measure?

This is the cardinal issue of the minimal pay measure. There might be a herding out consequence where people who more qualified and have more bargaining power might use for the occupation in the sector with minimal pay during an economic down rhythm when they are unemployed.

In add-on, even though there are statements that the impact of minimal pay is minimum, nevertheless, these surveies are conducted in developing states who have already implemented the lower limit for a period of clip. The economic construction of these states is rather different from that of Hong Kong. Most of the low-income earners are the fast-food concatenation earners, cleaners, security guards, eating houses waiter, waitress and cleaners, workers in HK manner tea houses and road-side noodle houses, peddlers and bringing male childs.

There is a strong inquiry the displacement impact under the “ demand supply theoretical account ” or the bargaining and preparation costs consequence is stronger. Based on the surveies conducted by the Hong Kong Association of Small and Medium Enterprise, at HK $ 24 an hr, the minimal pay would be 30,000 occupations ( i.e. 1 % of the work force ) . In another article in the Economist, it was forecasted that if the lower limit pay was set at HK32, so 170,000 employees would lose their occupation, duplicating the current unemployment rate.

The group with the least bargaining power such as the immature immigrants from China working in HK eating house, edifice sites, bringing services or cleaning concern will be the first to be laid away. Alternatively of basking the benefits of the minimal pay measure, they will be the victims to the jurisprudence and lost their employment wholly.


Due to the imperfect market conditions and the failure of the “ unseeable manus ” , the pay floor ( minimal pay ) is set to guarantee that workers are non exploited and are able to gain an “ efficient pay ” that can counterbalance them for their productiveness.

However, due to the difference in market construction in Hong Kong, it is certain that minimal pay would hold a negative impact in the demand for labor, to what extent could the “ income consequence ” and “ turnover consequence ” could get the better of it is yet to be seen. However, if the authorities is concern with the deficiency of dickering power of low accomplishment worker, minimal pay entirely would non be sufficient to get the better of such job. The authorities should hold other strategies including re-training, on the occupation preparation subsidies, working jointly the minimal pay measure.


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