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Price Dynamics and Minimum Wage


Minimum wage is the least pay given to employees by employers for work done within a given period of time. This duration could range from an hour; week or a month. In other words, it is the least pay at which employees may trade their labor services. Despite the fact that minimum wage has a legal basis; there are different views on and about the remuneration and drawbacks of minimum wage. Views supporting the minimum wage policy argue that, it improves the living standards of employees and reduces poverty. On the other hand, views against minimum wage argue that it is too idealistic; increases unemployment among low productivity workers and as a result hampering the productivity of lowly skilled workers to the advantage of the highly skilled ones. (Eatwell, 1987)

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A price floor is an organizational; or government limit on how low the price to be charged on a product can be. As a measure to ensure that the price floor operates successfully; it is placed slightly over the equilibrium price. The consequences of a price floor include; the increase of prices of products as it is set slightly above the equilibrium price; reduction of purchases or shuttering of the demand for the given product as a result of the price increment. This situation brings about losses as a result of the surplus produce that accumulates following the high produce by suppliers and the reduced demand. This situation leads to surplus production; and to correct this situation the government removes the price floor. (Black, 2003)

The economic implications of implementing a legal minimum wage include; the creation of labor unions or improvement on the available ones with the aim of having the jobs of members protected by the minimum wage policies. Secondly, low paying employers such as hotels and recreation facilities fund the employment policies association that are known to have released a number of ideas opposing the minimum wage policy. This policy is also expected to improve the living standards of the poor and the vulnerable groups that have a major effect on the economic levels. Implementation of minimum wage policy would mean the phasing out of low price competitors; producing numerous industrial-economic imbalances like price rise and unemployment. Minimum wage policies also have a greater effect on small than large business through the reduction of labor needs. This may be achieved through reducing the number of workers or the number of hours worked by each employee. (Black, 2003)

This strategy reduces the proceeds margin of investments hence making investors change to businesses that do not make use of low-skilled workers. The policy also heightens the levels of consumption by providing more income to be spent by the low-income workers. On the other hand businesses raise prices of products as an attempt to regain the lost profit and in the process reversing funds back to the government in form of taxes; and the reduction of government social welfare income on the individuals whose incomes have increased. The policies bring about reduced state income as a result of outsourcing of domestically manufactured goods so as to evade the high labor costs. (Neumark, 2008)

The law of demand provides that; if all other factors are held constant; the higher the price of a commodity, the less the client population will demand the given product. On the other hand the law of supply argues that holding other factors constant; the higher the price the, the higher the quantity supplied. According to these laws the immediate removal of minimum wage would mean that the price of labor becomes as low as possible. If this is the case then employers would demand for more labor due to its low cost and availability. On the other hand the workers would reduce the supply of labor as a response to the low wages paid in return. (Eatwell, 1987)

As to whether the raising of the minimum wage would improve the living standards is debatable. This is because the poor and vulnerable would have their labor fetch more income and as a result have their standards of living improve. This rise would also mean that workers earn more due to the high expectations from the employers. This motivation would further lead to improved incomes that will mean improvement of living standards. There is an improved individual right awareness among the workers and this would also create the need for an enforcement agency that further creates employment for the population in question. (Neumark, 2008)

However on the other hand the minimum wage policy would compromise the welfare of individuals by excluding low-cost competitors that further leads to increased prices as a result of the reduced competition in production. It will also compromise the living standards of individuals through creating unemployment among the unskilled workers. The policy would also reduce the profitability of small businesses due to the increased cost of labor meaning that the investors would make less income and eventually drop from the market. The reduced profit margin would lead to price increment that would further affect the living standards of the population. (Eatwell, 1987)

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As discussed earlier the minimum wage policy can help reduce poverty to some extent, but at the same time result to its development. This can be explained through the unemployment conditions that come up as a result of the shift from small scale labor intensive businesses to low labor dependent businesses. (Neumark, 2008)

Poverty reduction policies can be classified into those that enhance opportunity creation; those that seek to empower the poor and vulnerable; and those that address issues of income security. Aid allocation as a poverty reduction policy can be more helpful than the minimum wage policy in that; it will help create opportunities to help the poor move out of poverty; it can also act as a source of empowerment that is important in planning for development from poverty; and it can also provide income security that forms an important role in poverty alleviation. (Black, 2003)


Minimum wage policy as a poverty reduction measure is practical but has the disadvantage that the benefits may be felt by only a part of the target group. The groups that are likely to gain include the large scale business operators and skilled workers. However the unskilled workers and owners of business that need intensive labor will be on the loosing end as the benefits of this policy do not cut across all the groups in society.


Black, A. (2003).Oxford Dictionary of Economics. Oxford University Press, pp. 300.

Eatwell, J., Murray, M., & Peter, N. (1987). The New Palgrave: A Dictionary of Economics. London: The Macmillan Press Limited.

Neumark, D. William, L. (2008). Minimum Wages. Cambridge, Massachusetts: The MIT Press.

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