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There are several problems that led to the institution of the minimum wage laws in many states. There was the problem of low living standard among the unskilled population in many countries that was caused by the inadequate salary that organisations paid the unskilled workers (Hansen& Machin, 2002). That income was very low which made these people languish in poverty as they could not meet the three basic needs that are food, clothe and shelter. Increasing income to these persons would also lead to economic growth as there is an increase in exchange of money. The government also wanted to solve the problem of inequality in the wage distribution between the skilled and the unskilled workers. Organisations paid their skilled workers high salaries as compared to the low salaries they paid their unskilled employees such as cleaners, security personnel and messengers
The government also thought that it would solve the problem of unemployment by instituting the minimum wage laws. They thoughts that implementation of these laws would attract the youths and less-skilled people into the job market hence solve the unemployment problem. There was also the need to raise the extremely low wages paid to less-skilled workers that were determined freely by the labor supply and demand (Hansen& Machin, 2002). These laws were expected to help in the reduction of the government’s expenditure on social welfare by raising income to the least paid workers. The government also wanted to reduce the rate of crime as people try to earn money through illegal ways such as stealing by encouraging them to join the workforce.
Minimum wage has various economic effects in the different working populations. It increases the income of the teenagers and the less-skilled workers. Increase in income leads to better living standards and the elimination of poverty among these populations. Consumption in income increases that result in economic growth (Neumark,Schweitzer&Wascher, 2004). Minimum wage also increases the salary of the skilled workers. Hence, they experience positive economic effects such as improved standard of living. Introduction of minimum wages forces organisations to replace their less-skilled workers with specialized ones. Retention of skilled workers lead to a more income consumption among this population, and this leads to increased economic growth. Minimum wage also hurt the job prospect of the disadvantaged workers (Neumark, Schweitzer&Wascher, 2004).Disadvantaged workers are those workers who are crowded out of the job market as many teenagers from the suburban areas apply for these jobs. This population loses their income, and this makes them experience the negative economic effects such as low living standard and poverty.
Introduction of minimum wage leads to some unintended effects. One of these unintended effects is unemployment. Organisations replace their less skilled labor with skilled ones so that they can increase efficiency and cut the labor cost. Introducing low minimum wage can help in reducing this problem as companies will have enough finances to pay their employees. It can also lead to inflation as organisations try to compensate for increased labor cost by increasing the cost of goods and services (Neumark,Schweitzer&Wascher, 2004). Setting low minimum wage can assist in lowering the labor cost that consequently reduces the rate of inflation. It also makes small businesses to suffer more than large businesses because they don’t have enough finances to pay for their workers. Reducing the minimum wage can help curb this problem. It also reduces the growth in the creation of less-skilled jobs. Policy makers can control the problem by setting low minimum wages so that companies can be enticed to create less-specialized jobs.
Hansen, K., & Machin, S. (2002). Spatial Crime Patterns and the Introduction of the UK Minimum Wage*. Oxford Bulletin of Economics and Statistics, 64(supplement), 677-697.
Neumark, D., Schweitzer, M., & Wascher, W. (2004). Minimum wage effects throughout the wage distribution. Journal of Human Resources, 39(2), 425-450.