In most countries around the globe, there is an established minimum wage and subsidies for the workers, which aim is raising the life quality of the population, reducing unemployment, and decreasing the income disparity. However, is such an instrument effective? Does it have negative side effects? This paper analyses the topic of minimum wages and subsidies as well as their negative and positive effect on business in Australia.
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It should be noted that the first legislation regarding minimum wages is traced back to Australia and New Zealand, where wage issues between workers and businesses were resolved through such legislation as an alternative to strikes, through the organization of several boards (Maughan). In that regard, understanding such a concept require distinguishing between three types of labor, high-wage, low-wage, and minimum-wage, where for the latter the term unskilled is applicable (Dowrick & Quiggin, 2003). In Australia, the responsibility for setting minimum wages for employees in the national system is taken by Fair Work Australia, a national workplace relations tribunal (Fair Work Australia, 2009).
The first and the most important impact can be seen through the correlation of minimum wages and subsidy with employment. Such an effect can be seen through the consideration that minimum wages will be reduced. In that regard, such reduction might discourage unemployed workers to apply for jobs, where the reduction of wages would lead to that the work will not have financial worth (Brotherhood of St Laurence, 2005). Accordingly, the increase of the minimum wage should lead to that unemployed job seekers, specifically in the category of unskilled workers will find it financially attractive to apply even for a minimum-wage job. The consequences of the latter can be seen in a workforce surplus, which consequently might lead to an increase in productivity. It should be noted that such an increase might affect the areas of business relying on unqualified labor.
Accordingly, the appositive effect of the minimum wages can be seen in reducing the poverty, which is one of the aims of establishing minimum wages in the first place. It should be mentioned that minimum wages and subsidy separately might not have the intended effect as much as the combination of both. Such a combination can help low-wage workers in avoiding disemployment effects (Husby, 1993). Additionally, it was stated that the correlation between minimum wages and poverty is connected with the distribution of workers across households, where “many minimum wage workers are members of households with total incomes well above the poverty level” (Dowrick & Quiggin, 2003), e.g. teenage children of high-income parents. Nevertheless, it was found that increases in minimum wages reduce poverty, although the strength of the findings varied between the studies (Dowrick & Quiggin, 2003). The logical conclusion leading to the effect on business can be seen through an increase in the consumption power of the population. In that regard, it can be stated that the increase of per capita income of the population has a favorable effect on the business, where the increase in demand leads to an increase in production and profitability.
Another positive impact of minimum wages and subsidies can be seen through the effect on the economy. It is argued that in correspondence to the supply and demand theory, the establishment of minimum wages increases economic efficiency and fairness. The basis for such impact can be seen in that manual and unskilled workers are initially suffering from inequality of bargaining power, leading to low wages, which do not cover the full social cost of labor. In that regard, minimum wages raise wage rates for low-paid workers to the level that covers the social costs of their contribution to production. Accordingly, the subsidy is assumingly having a similar effect, in which it compensates for the inequality of the low social cost of labor of low-paid workers (Kaufman, 2009). In terms of business, such compensation might drive the companies to search for sources of competitive advantage, in which quality of product, technological advancement, and improvement of business processes will be the main factors. The result of the latter can be seen through decreases in the prices of the product as well as increases in profits. These methods of self-correcting social responsibility can be seen in opposing direction with subsidy, where minimum wage reduces the subsidy on low-wage labor and improve production and employment to a competitive level.
The negative effects of the minimum wage can be seen through decreasing the possibility for labor to be developed. It can be seen that there is a large portion of the minimum-wage workers who are either teenagers or part-time workers, who do not perceive such jobs as an opportunity.
On the other hand, the existence of a minimum wage, which assumingly will increase with the improvement of the economic conditions of the country might lead to many unskilled workers will not be motivated to pursue formal training and professional education, preferring to work on a minimum-wage job, combined with a subsidy received from the government.
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Additionally, it can be assumed that the category following the minimum-wage labor, low-wage labor can be seen affected through the establishment of minimum wages, specifically set them relatively high. Evidence from Australia and other countries suggests that “a minimum wage which is set too high can harm the employment prospects of low skilled workers and others who are most vulnerable in the labour market” (“Minimum wages and their effect on employment,”). At the same time, it is argued that many of the recipients of the minimum wage and the subsidy, such as teenagers, might reside in high-income families, and thus, do not need the extra income.
An important factor can be seen through the effect of established minimum wages and subsidies on small businesses. It is argued that the competitiveness of small businesses can be affected, where small businesses might be forced to pay their low-skilled workers higher wages, and at the same time fail to hire additional labor due to increases in minimum wages. However, it should be stated that such a point is debatable, where the results of the studies oppose each other, and in the short term a discernible correlation between minimum wage increases and a rise in business failures might not be found (Bernstein, 2004). Subsidies, on the one hand, can help maintain the balance, compensating labor costs for small businesses. On the other hand, it can be seen that subsidy might help negate such an effect on business, where such effect might take place until a certain balance is restored. In that regard, it can be assumed that such an effect of subsidy might be in that it will be hard for companies to compete internationally, specifically with countries, in which the price of labor is not imposed, being driven only by the market.
It can be concluded that minimum wages and subsidies have both positive and negative effects, where the implementation of both might have a more positive intended outcome than the separate implementation. Accordingly, it can be stated that positive impacts outweigh the negative, specifically in terms of the evidence and the findings provided by supporting studies
Bernstein, J. (2004). Minimum Wage and Its Effects on Small Business. Economic Policy Institute. Web.
Brotherhood of St Laurence. (2005). Minimum wages. Brotherhood of St Laurence. Web.
Dowrick, S., & Quiggin, J. (2003). A SURVEY OF THE LITERATURE ON MINIMUM WAGES Australian National University and University of Queensland. Web.
Fair Work Australia. (2009). How minimum wages are set. Fair Work Australia. Web.
Husby, R. D. (1993). THE MINIMUM WAGE, WAGE SUBSIDIES, AND POVERTY. Contemporary Economic Policy, 11(3), 30-38.
Kaufman, B. E. (2009). Promoting Labour Market Efficiency and Fairness through a Legal Minimum Wage: The Webbs and the Social Cost of Labour. British Journal of Industrial Relations, 47(2), 306.
Maughan, J. History of Minimum Wage. Life123. 2009. Web.
Minimum wages and their effect on employment. Australian Government Submission. 2009. Web.