Human Resource Economics: Essay on Minimum Wage

Running head: ECONOMICS
Human Resource Economics: Essay on Minimum Wage
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ECONOMICS
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Table of Contents
Introduction......................................................................................................................................2
Analysis of economic theory underpinning minimum wage...........................................................2
Arguments in favor of adopting a minimum wage..........................................................................5
Arguments against of adopting a minimum wage...........................................................................6
Luxembourg’s current experience with a minimum wage regime in place.....................................7
Conclusion.......................................................................................................................................8
References......................................................................................................................................10

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Introduction
Minimum wage is one of the most important aspects of the labor markets across the
world. As depicted by Sümer (2018), minimum wage represents the minimum amount of legal
wage or remuneration that any employer must pay to the workers for the work performed by
them during a certain given period of time. This amount of wage is the lowest legal amount of
remuneration, which the employers cannot reduce through collective bargaining or agreement or
any individual contract. Minimum wages are devised for protecting the employees of any
organization against any unduly low pay and exploitation (ILO). As per the information in the
website of ILO, almost more than 90% of the member states of the ILO have minimum wages
(Ilo.org 2019). As the countries face income inequalities as well as wide gap in real wage growth
rate, they adopted the policy of minimum wage to protect the interests of the workers.
The concept and imposition of minimum wage have various different aspects along with
arguments in favor and in against of the imposition of minimum wage. This report will illustrate
the theoretical underpinnings of minimum wage with the aid of diagrams and in reference to the
incidences in the market structures like perfect competition and monopsony, followed the by
arguments for and against the adoption of minimum wage policy, and example of a country will
be provided in regards to the regime of minimum wage.
Analysis of economic theory underpinning minimum wage
Minimum wage is measure of price control by the government of a nation. As stated by
Cowell (2018), price control refers to the regulation devised and imposed by the government that
establishes the minimum or maximum price to be charged by the sellers for specified goods or

Wm
W
Q
E*
E1 E2
Wage/
hour
Quantity of
labor
Q1 Q2
S
D
Minimum
wage
Excess supply of
labor
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services during inflation or deflation. In other words, price controls represent restrictions
enforced by the governments that determine the prices to be charged. There are two types of
price control, price ceiling and price floor. Price ceiling defines the maximum wage that can be
charged by the sellers, while price floor is the minimum wage, which can be charged. Hence, in
case of price ceiling, the sellers cannot raise their prices and in case of price floor, the sellers
cannot lower their prices (Abraham 2015). Minimum wage is a widely accepted example of price
floor policy as wage is the price of labor.
Figure 1: Minimum wage in labor market
(Created by author)
As stated by Horton (2017), the laws on the minimum wage implies price control on the
labor, however, these laws set artificially high price in the labor market. These wage policy is
made in such a manner that it creates inflation and excess supply in the market for labor, as
shown in the above diagram. Companies that can pay the minimum wage can employ the