Question

From a purely economic point of view, should the government impose price floors on wages, otherwise known as a minimum wage? What are the pros and cons of doing so, and do the pros outweigh the cons or do the cons outweigh the pros? Explain.

Answer 1

Pros: People searching for job opportunities: 1. Can feel secure of obtaining a wage that is enough to live with dignity. 2. Standardize the negotiation across all labor markets, making it easy to contract workers at minimum wage. Cons: 1. The allocation of resources by market mechanism won't work for low range salary jobs. This can create inefficiencies like the supply of work (unemployed workers) not hired. 2. Levels of production not matching the demand in certain levels (the minimum price of a product is higher than a scenario where not regulated wages). 3. If the productivity of the job position is below of the cost, the employer won't be able to produce at all.

Step-by-step explanation:

In order to assess if the pros outweigh the cons we need to have specific market situations. Per example, in countries where the average productivity per worker is higher than the minimum wage in the majority of labor markets, the pros outweigh the cons. In countries where productivity per worker is lower than minimum wage, is expected to see high levels of unemployment and distortion in the price of factors, putting pressure in other economic variables. In this scenario, the pros not outweigh the cons.