The effects of a binding minimum wage


A binding lower limit pay leads to legion damaging effects in a competitory labor market. This essay will foreground what these effects are, and what the result of these effects will convey to the labor market.

A labour market is defined by Parkin as a market where “ employers are on the demand side and workers are on the supply side. Firms make up one’s mind how much labor to demand, and the lower the pay rate, the greater is the measure demanded ( Parkin, et al. , 2008 ) ” . It is said to be competitory when there is a excess of workers that are seeking a occupation, with few employer ‘s willing to engage.

A minimal pay is a monetary value floor implemented by the authorities, which ensures that an employer must pay a minimal rate of wage to an employee, and anything lower than this rate of wage is illegal. “ A minimal pay is adhering if it is set above the equilibrium pay ( Parkin, et al. , 2008 ) ” . “ With a binding lower limit, pay accommodations are blocked and the market is prevented from apportioning labour resources ( Parkin, et al. , 2008 ) ” .

The Effectss

2.1 The Labour Market due to the lower limit pay

In the labor market, there is said to be an equilibrium pay. This is where the demand and supply lines on the minimal pay graph intersect, as it is the point that the rate of wage is tantamount to that of the measure of hours worked/required. A adhering lower limit pay in a competitory labor market means that this equilibrium point is offset as the rate of wage must lift. This can be shown utilizing the undermentioned graph ( Parkin, et al. , 2008 ) .

With relation to portion ( a ) of the Parkin ‘s graph antecedently, it is apparent that the pay rate of a‚¬5 on the Y axis is the equilibrium monetary value, and 21 million hours per hebdomad is the equilibrium measure on the X axis. “ The lower limit pay is below the equilibrium pay rate and is non adhering ( Parkin, et al. , 2008 ) ” .

Where the rate of wage has increased, and all employees are being paid a higher pay, the engaging company can non afford to engage as many employees as it will be excessively expensive, because non merely do they hold to pay rewards for the skilled occupations, they besides have to pay a higher pay than they would hold intended for workers to execute the lower skilled occupations. Therefore this means that there will be workers on the supply side who will non be able to acquire a occupation, therefore the unemployment rate will lift. This can be shown in portion ( B ) of the graph ( Parkin, et al. , 2008 ) .

With relation to portion ( B ) , it can be seen that “ the lower limit pay is a‚¬6 an hr, which is above the equilibrium pay. The equilibrium pay is now illegal. At a minimal pay of a‚¬6 an hr, 20 million of hours of labors are demanded and 22 million hours are supplied ( Parkin, et al. , 2008 ) ” . This difference that has been created due to the adhering minimal pay creates a excess of 2 million hours of work per hebdomad in the graph, which means that the unemployment rate now rises. This new lower limit pay besides means that unemployed workers are willing to provide the 20 millionth hr for a‚¬4 ( Parkin, et al. , 2008 ) .

2.2 Inefficiency of the Labour market due to the lower limit pay

The minimal pay is non efficient, as Parkin states it “ consequences in unemployment – wasted labour resources – and an inefficient sum of occupation hunt ( Parkin, et al. , 2008 ) ” . When looking at a minimal pay graph, a deadweight loss is present. This occurs because of a lessening in both the workers surplus and the company ‘s excess. This is seen in the undermentioned graph ( Parkin, et al. , 2008 ) .

Besides seen in this inefficiency graph is a possible loss from occupation hunt. This loss is said to originate “ because person who finds a occupation earns a‚¬6 an hr but would hold been willing to work for a‚¬4 ( Parkin, et al. , 2008 ) ” . This inefficiency affects the labour market as it means there is a deadweight loss of 1 million hours of work per twelvemonth.

3.0 What might soften my reading?

The usage of a minimal pay brings legion damaging effects to people. When looking at the results of a minimal pay, “ it delivers an unjust consequence and imposes unjust regulations ( Parkin, et al. , 2008 ) ” . Parkin besides states that this is unjust because merely those who can happen a occupation benefit, whereas the unemployed terminal up worse off than with no minimal pay ( Parkin, et al. , 2008 ) .