Essay: Impact Of Government Minimum Wage Policy On Effectiveness.

In a market economy, market forces answer the fundamental economic questions of what to produce, how to produce and for whom. However, in many markets, the government intervenes with measures that impact on market outcomes, such as the output level and equilibrium price. These interventions are aimed at improving social and/or economic outcomes and directly impact on the answers to what, how and for whom.

You are required to select an example of a government economic policy that is directed at a particular market and investigate why the policy was introduced and discuss its impact and effectiveness. You should clearly outline the social and economic objectives being addressed by the policy. You are to include evidence on how the policy is working to-date and on the impact it is having on various economic entities (e.g. producers, consumers, households and government).

Types of Minimum Wage Rates in New Zealand

The government can affect the wages and employment by imposing a minimum wage. The objectives of such legislation are: To prevent firms from paying substandard wages when labor market conditions enable them to do so. Also, to establish a wage floor representing some minimal level of living. Also, to increase purchasing power by raising the incomes of low wage workers. In the presence of productivity effects of minimum wage, adverse employment will be reduced or eliminated. Bugarin and Moller (2002) give possible reasons for minimum wages to have productivity effects.

• The higher wage reduces worker turnover, increasingthe level of worker experience and reducing training cost.
• The higher wage attracts more skilled and productive workers to the laborforce
• Higher wage rate employers demand more effort from employees
• Higher wage employees tend to increase work effort to keep their positions
• The firm uses laborsaving capital

There are different types of minimum wage rates in New Zealand: adult, starting out and training (Employment Of New Zealand 2018).  The minimum wage for adult applies to all employees aged to 16 years and over who are: not starting out workers or trainee or involved in supervising or training other workers. What this means will depend on each situation. For example, it would include one employee overlooking the work of the other, in the production of their job; the operative doesn't have to be with the same skills. The overseeing or training needs to be part of that person’s job, not just a one-off even (Hyslop & Stillman 2007). Starting out minimum wage, 16 and 17-year-old employees who don’t have around six months experience working in the same employment. After six months working at the same employment, they must be paid the adult minimum wage. ,18 and 19-year-old  employees who have been paid some social benefits for six months or more, and those who still don’t six months experience with the employer since they started being paid a benefit. This benefit includes an emergency benefit, sickness benefit, jobseeker benefit.

There are as of now not many price controls left in New Zealand: most prices are recognized by the market forces of supply and demand and are free to move to equilibrium without restriction. However New Zealand labor market still has minimum price policy in that it is illegal to pay a wage below $16.50 (Employment Of New Zealand, 2018). Figure 1 (A) Examines what economic theory predicts to be the consequences of imposing a minimum price law in the labor market

• The model above characterizes the market for unskilled labor.
• The demand for unskilled laboris shown via the demand curve D0. Employers will best call for labor within the thing marketplace if there are good possibilities to sell the output of labor in the goods market. The demand curve for labor slopes downward because of the operation of the regulation of diminishing returns. In the long run, each extra worker hired adds less and much less to output; this is, the marginal product of the labor of each extra worker employed diminishes. If the additional output generated by each additional worker decrease, then the additional revenue that each new worker generates will also decrease. A profit-maximizing organization can be prepared to hire a further employee handiest if the extra sales generated is extra than the added fee for the people’ wages. The demand curve for labor also slopes downward due to the fact as the charge of labor rises employers have an increasing incentive to substitute machines for labor if that is technically viable( Hyslop & Stillman 2007).
• Curve S0 indicate the unskilled labor. Labour is providedvia folks that are seeking to earn wages inside the thing market. At any given wage rate a person has the selection of accepting a task or no longer. Increase in wage rate, leads to the rise of opportunity cost of choosing now not to work. Consequently, excessively wage prices leads to  growth in the amount of labor provided and so the demand curve slopes upward. Alternatives to working may be to enter a training route, to stay at domestic and watch television, or to head on vacations. At any given salary charge the ones individuals who receive paintings will regard the wage-price as being greater precious than their subsequent excellent opportunity forgone, while those folks that do now not take delivery of work will consider a few different interests as being more treasured than the salary rate. Delivered the concept of possible cost and saw that a boom in the salary price would grow the amount of labor provided

Returning to figure 1 (A), Given the supply of labor at distinct wage rate and the call for labor at specific Wage rate, the marketplace for unskilled labor is in equilibrium at a salary rate of PE. The wide variety of humans in paintings at this wage rate could be QE. If the Wage rate PE is taken into consideration to be very low, it's far probably that there will be political pressure to enhance the scenario. Frequently, this outcome in the enactment of a minimum wage regulation that intends to set up a wage permitting someone with low paintings skills to have an inexpensive minimal widespread of the dwelling. However, although the expected outcome of this law is desirable, the actual result can be harmful. From figure 1(A), we imagine that the government passes a minimum wage law of P1. It means that it is now illegal for an employer to pay wages less than P1.

Consequences of Imposing Minimum Price Law on Labor Market

At a wage of P1, employers find that some of their workers are unable to generate enough production to make enough revenue from sales to cover the minimum wage rate. By continuing to employ these workers, employers will be less profitable and marginal firms will be in danger of failing. There are therefore powerful economic incentives for employers to reduce the number of workers employed until the last worker generates sufficient revenue by his or her work to cover the now higher wage rate. At the higher wage rate, many employers will find an alternative means of production.For example, using more skilled labor instead of unskilled labor. In this way, employers would move along their demand curve for labor, D0, from E0 towards A.

It is merely an application of marginal analysis and the marginal principle from chapter 5. The profit-maximizing employer will continue to employ labor so long as the marginal benefit (MB) is higher than the marginal cost (MC). In the context of the labor market, the marginal benefit of employing an extra worker is the value of his or her additional output when sold in the goods market. The marginal cost of employing that worker is the wage rate plus any other costs of employment. Therefore, when the wage rate increase, MB< MC. To maximize their profits employers will reduce the number of workers they employ to return to the profit-maximizing situation of MB=MC.

As far as the supply of labor is concerned, the new minimum wage law of P1 is a much more attractive wage than the old wage rate of PE. It will be more attractive for people who previously did not seek work at PE to now seek work P1. This change of behavior is shown by a movement along the supply curve S0 from E0 to B

In figure 1 (A) at P1 the quantity of labour supplied, QS, exceeds the quantity of labour demanded, QD; that is, there is unemployment. Three different groups are affected by the minimum wage law:

• Group 1: It consist of unskilled workers whose earlier employment wage was at PE and, following the minimum wages policy, are now at P1. They are clearly better off following the wage law. It is clear that the government considered this group when it passed the minimum wage law. 

• Group 2: It consist of unskilled workers whose earlier employment wage rate was at PE, but now that minimum wage has been set   P1 they have been made redundant. When the wage rate was PE, these people choose to work. Now that they have lost their jobs they will be forced to do different stuff that is of no importance than a wage rate of PE. This group is very disadvantaged by the wage law. It is possible that the government hoped that this group would be precise orperhaps did not consult the wage law might have this unintended consequence. 

• Group 3: It consists of those people who did not seek out for employment at a wage rate of PE, but instead choose to do other stuff. At wage rate P1 there is high competition for the jobs available, but until there is an opening, they continue to do what they were previously doing. This group is no worse off as a result of the wages law. However, the existence of this group leads to stiff competition in the labormarket and makes it much more difficult for people from other groups to complete for the fewer jobs that are available,

Therefore, the group that has been most disadvantaged by the minimum wage law is group 2. They are deprived of earning an income and are subject to competition from those in group 3 as they try to find another job. So although the purpose of the minimum wage was to help those earning low income, group 2 is now worse off. It is often minority and disadvantaged groups who make up group 2. Milton Friedman, Nobel Prize-Winning economist, has said that the United States minimum wage laws constitute the single most anti-African American body of legislation, not by intention but by consequence. Low-income earners can use low skilled work opportunities to develop skills that will in time enable them to progress to a higher paying job. In other world, people seldom stay in the very low-wage labour market for long. Over time they develop skills and progress to higher paying jobs. However, minimum wage laws reduce the number of low- paying jobs available and create a barrier of unemployment that prevents many people gaining the opportunity to earn an income at all; thus, many people do not get the opportunity to develop employable skills. These people very often suffer in terms regarding low self-esteem and develop anti-social behavior and attitudes as they remain welfare-dependent for long periods of time.

Minimum wage policy have some impacts on the economy which includes: raising the minimum wage would increases the wage floor hence, enables the employers to reduce the turnover. Also, a drastic change would cause unemployment ( Neumark & Wascher2004).  Businesses would have to raise the price of their consumer goods to compensate for the higher costs of employees could lose potential customers due to unemployment since they can’t afford the company’s services.

Conclusion

The impact of minimum wage on employment is uncertain. However, critical analysis reveals that the effect of the policy does not have to be homogeneous, because most workers do not sell homogenous units of labor as the labor market models assume. This is because people differ in both natural endowments and in the skills and experiences they have to offer. Some workers devote extra years to schooling and specialized training; In return, they earn higher lifetime incomes than those who never make the sacrifices needed to improve their qualifications. These efforts at job preparation and training are called “human capital investment.”It helps explain some of the disparities in wage and employment levels that exist in real-world labor markets. Also, it depends on the structure of the labor market; real-world labor markets appear to be segmented each market has its own characteristics that help determine wage and or employment levels. These three will differ not only between countries but also between sectors within the same state. Nevertheless, it is evident that negative employment effects are prevalent in these studies thus highlighting the relevance of the neoclassical model in all its variations. Studies in industrialized countries have focused on the impact of the policy on particular segments of the labor market like teenagers and women.

References

Hyslop, D., & Stillman, S. (2007). Youth minimum wage reform and the labor market in New Zealand. Labour Economics, 14(2), 201-230.References

Employment in New Zealand. (2018). Current minimum wage rates. Retrieved from www.employment.govt.nz: https://www.employment.govt.nz/hours-and-wages/pay/minimum-wage/previous-rates/

Neumark, D., & Wascher, W. (2004). Minimum wages, labor market institutions, and youth employment: a cross-national analysis. ILR Review, 57(2), 223-24

Neumark, D., & Wascher, W. L. (2007). Minimum wages and employment. Foundations and Trends® in Microeconomics, 3(1–2), 1-182.

Bugarin, A., & Moller, R. M. (2002). Minimum Wage: Who gets it and what Difference Does it Make? (Vol. 2, No. 11). California Research Bureau.