Human Resource Economics: Essay on Minimum Wage

This essay discusses the economic theory underpinning minimum wage, arguments for and against it, and Luxembourg's experience with a minimum wage regime. It highlights the impact of minimum wage on the labor market and the economy, and the pros and cons of its implementation.

Running head: ECONOMICS
Human Resource Economics: Essay on Minimum Wage
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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

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Wm
W
Q
E*
E1 E2
Wage/hour
Quantity of laborQ1 Q2
S
D
Minimum wage
Excess supply of labor
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

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MRP
MFC
S
Minimum wage
W
Wm
Lm L1L2 Labor quantity
Wage, marginal
factor cost, marginal
revenue product
available labor. If the wages fell naturally down the demand curve for labor, then level of
employment would be increased. Thus, the minimum wage laws have inflationary effects.
Figure 2: Minimum wage in monopsony
(Created by author)
According to the theories of demand and supply, minimum wages lead to welfare and
employment loss. However, in case of monopsony, that is, market with a single employer, the
minimum wage can improve the market efficiency, although the matter is debatable. Strobl and
Walsh (2016) highlighted that the wage level under monopsony market structure is usually lower
than in the competitive market for labor. Under the competitive market, the workers receive the
wages which are equal to the MRPs. In a perfect competition market, application of minimum
wage reduces the employment level necessarily when it is implemented above the market
equilibrium wage (Azar et al. 2019).

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On the other hand, under monopsony, minimum wage that is set above the market
equilibrium wage could raise the level of employment along with a boost in the wage. Another
view says that a raise in the minimum wage results in higher unemployment level following the
basic rule of demand and supply. According to some other economists, since the demand for the
unskilled workers is relatively inelastic, a higher level of minimum wage pushes up the wages of
the unskilled labor in the market. Thus, minimum wage policy is considered as a justified ground
for reducing labor exploitation even if it increased unemployment (Strobl and Walsh 2016).
Arguments in favor of adopting a minimum wage
There quite a few arguments in favor of imposing a minimum wage in the labor market.
Kreiner, Reck and Skov (2017) stated the fundamental reason of adopting the minimum wages
was to prevent the firms from exploiting their employees and ensuring that they have money to
maintain the quality of life and when a firm cannot pay this minimum wage, then the business is
not viable and that business would be dependent on wage subsidies. Thus, minimum wages paid
by the companies are determined by the cost of living of a particular region.
Adams (2017) highlighted that minimum wages protect the tax payers from the firms’
rational desires of getting something for nothing. The author also stated that if the government of
a nation does not include minimum wage in their system, then the wage is driven down below
the subsistence wage level from the co-existence of the level of employment with the in-work
benefits. The government earns tax revenues mostly from the household sector and not from the
business sector and in the long term it will would be non-sustainable. Thus, it is argued that the
burden on the taxpayers is reduced if minimum wage is imposed as the dependency of the lowest
paid workers on the social assistance programs is decreased due to the minimum wage earned.

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According to Jardim et al. (2017), minimum wage is needed in an economy due to the
following reasons. It helps to raise the average wage and the living standard of the most
vulnerable and poorest in a society. It also does not have any impact on federal budget as
minimum wage does not increase taxes or public sector borrowing. Furthermore, the minimum
wage is found to stimulate the consumption as it increases the flow of money of the low-income
group, and helps to reduce government’s cost for the social welfare programs by raining the
income level of the low-income group (MaCurdy 2015). Lastly, Meer and West (2016)
mentioned that minimum wage does not have significant impact on the level of unemployment in
comparison to other economic elements and hence, does not put much pressure on the welfare
system.
As stated by Litwin (2015), raising minimum wage has helped to decrease employee
turnover and at the same time, have been helpful in reducing the income inequality. Hence, it can
be inferred that minimum wage is primarily beneficial for reducing exploitation of labor by the
employers, improving the living quality for a certain group of people and reducing the tax
burden.
Arguments against of adopting a minimum wage
While there is argument in favor of introducing minimum wages, there are also some
arguments against the imposition of minimum wages. As highlighted by Card and Krueger
(2015), the minimum wage leads to exclusion of the low-cost rivals from the labor markets as
many low-cost and low-profit earning firms cannot afford to pay the lowest wage mandated by
the government. Hence, the small businesses are more affected than the large businesses. It also
results in several industrial-economic inefficiencies such as poverty, unemployment and rise in

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prices. Seth (2017) argued that the imposition of minimum wages decreases the quantity
demanded of labor as wage is the price of labor and as per the law of demand, rise in price of any
good reduces the quantity demanded of it, while other things remain unchanged. Thus, the
impact of reduced quantity demanded of labor manifests through decrease in the work hours or
decreases in number of jobs.
Furthermore, it has been observed that it decrease the profit margins of the businesses
employing minimum wage labor, and thus, to earn a sustainable profit the businesses tend to
employ less number of low skilled workers, thereby affecting the low-skilled workforce (Sorkin
2015). At the same time, those businesses compensate their low profit by increasing the prices of
the goods manufactured and sold or services provided. Thus, minimum wage policy contributes
in creating inflation in the market.
It has also been noticed that the minimum wage does not help in improving the condition
of people living in poverty, however, it provides benefits to some people at the cost of the least
productive and poorest (). Lastly, as stated by Tilly (2015), minimum wage is responsible for
large scale outsourcing and loss of the manufacturing jobs in the domestic market. For example,
the minimum wage in the developed countries, such as, in the USA, is quite high and that makes
labor cost and production cost very high. Thus, to increase profit margin, the companies have
been outsourcing manufacturing activities to other countries where labor is cheap and minimum
wage is low (Tilly 2015). Thus, it can be said the minimum wage has a prominent impact on the
reduction of number of jobs, especially for the low skilled and poor workers.

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Luxembourg’s current experience with a minimum wage regime in place
Luxembourg has the highest minimum wage in the world. According to OECD (2019),
the minimum wage in Luxembourg is $13.78 per hour (in USD), which highest across all the
countries. In terms of Euro, in 2018, the minimum wage was €2.071.07 per month, which faced a
1.1% increase from January 2019, and it increased to €2485.29 per month for the skilled
workers. The entitlement of the minimum wage is dependent on qualifications of the workers,
which classifies them whether skilled or not. These qualifications include education, manual
skills, preliminary certificates, experiences of work. If the worker does not have any certificate,
then he must have 6 years of relevant work experience to be considered as skilled. The wage
increases by 20% for the skilled labor, while declines by 20-25% for the adolescent workers (17-
18 years of age). This implies that an organization must pay 20% more of the standard minimum
wage to the skilled labor and must pay minimum €1656.86 to workers of age 17-18 years with a
20% deduction and €1553.30 to the workers of age 15-17 years, with a 25% deduction
(Expatica.com 2019). The workers earning higher than the minimum wage in Luxembourg are
also affected by the National Indexation of Salaries. This is a standard, based on which the
employers adjust the wages according to the cost of living in the country. For example, if the
consumer price index (CPI) increases or decreases by 2.5% over a certain period, the employers
must adjust the wages of the workers to fit with the current cost of living of the nation (Kelly and
McGuinness 2017). Some industries, such as, those with non-standard work systems, also use
collective agreement process for deciding the minimum wage, however, that should not be less
than national minimum wage (Stanila, Cristescu, and Popescu 2016).

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Conclusion
In can be concluded from the above discussion that imposition of minimum wage is a
debatable issue across the world. Although more than 90 member countries of OECD have their
minimum wage policies, set as per their economic growth, stack of resources, cost of living etc.,
yet there are mixed impact of the minimum wage on the economy. On one hand, it is beneficial
for the low skilled and poor workers as the employers cannot exploit the labor, improves the
living standard of those people, reduces the cost of government for the welfare programs and
also eases the burden of the tax payers, on the other hand, minimum wage raises the price of
labor and thus, its demand decreases. The low skilled workers get affected most by this policy, as
the organizations tend to prefer hiring the high skilled workers to earn more profit to combat the
extra cost incurred from the minimum wage policy. The low scale businesses get affected more
than the large businesses. It has also contributed in the growth of outsourcing activities by the
businesses to reduce their cost of production. Thus, in the end it can be said that imposition of
minimum wage policy is very crucial due to its ambiguous effects on the economy, especially on
the low-income group of the communities. Hence, the governments and the businesses must
evaluate the pros and cons of the policy in accordance to their own economic situation prior to
the implementation of minimum wage.

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References
Abraham, Akampurira. Microeconomics: An Aspect of Development. diplom. de, 2015.
Azar, José, Emiliano Huet-Vaughn, Ioana Marinescu, Bledi Taska, and Till Von
Wachter. Minimum Wage Employment Effects and Labor Market Concentration. No. w26101.
National Bureau of Economic Research, 2019.
Card, David, and Alan B. Krueger. Myth and Measurement: The New Economics of the
Minimum Wage-Twentieth-Anniversary Edition. Princeton University Press, 2015.
Card, David, and Alan B. Krueger. Myth and Measurement: The New Economics of the
Minimum Wage-Twentieth-Anniversary Edition. Princeton University Press, 2015.
Cowell, Frank. Microeconomics: principles and analysis. Oxford University Press, 2018.
Expatica.com. "Luxembourg Minimum Wage and Average Salaries". Expat Guide to
Luxembourg | Expatica.
https://www.expatica.com/lu/employment/employment-law/luxembourg-minimum-wage-and-
average-salary-982309/, 2019.
Horton, John J. "Price floors and employer preferences: Evidence from a minimum wage
experiment." Available at SSRN 2898827 (2017).
Ilo.org. "Minimum Wages: An Introduction". Ilo.Org.
https://www.ilo.org/global/topics/wages/minimum-wages/WCMS_458660/lang--en/index.htm.,
2019.

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Jardim, Ekaterina, Mark C. Long, Robert Plotnick, Emma Van Inwegen, Jacob Vigdor, and
Hilary Wething. Minimum wage increases, wages, and low-wage employment: Evidence from
Seattle. No. w23532. National Bureau of Economic Research, 2017.
Kelly, Elish, and Seamus McGuinness. "A study of sub-minimum wage rates for young
people." ESRI and the Low Pay Commission: Dublin, Germany (2017).
Litwin, Benjamin S. "Determining the effect of the minimum wage on income inequality."
(2015).
MaCurdy, Thomas. "How effective is the minimum wage at supporting the poor?." Journal of
Political Economy 123, no. 2 (2015): 497-545.
Meer, Jonathan, and Jeremy West. "Effects of the minimum wage on employment
dynamics." Journal of Human Resources 51, no. 2 (2016): 500-522.
Seth, Vijay K. "Economics of Minimum Wage Legislations—Lessons for Emerging Market
Economies." Emerging Economy Studies 3, no. 1 (2017): 19-33.
Sorkin, Isaac. "Are there long-run effects of the minimum wage?." Review of economic
dynamics 18, no. 2 (2015): 306-333.
Stanila, Larisa, Amalia Cristescu, and Madalina Ecaterina Popescu. "A European Perspective of
the Minimum Wage Impact upon Labour Market." (2016).
Stats.oecd.org. "Real Minimum Wages". Stats.Oecd.Org. https://stats.oecd.org/Index.aspx?
DataSetCode=RMW, 2019.

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Strobl, Eric, and Frank Walsh. "Monopsony, minimum wages and migration." Labour
Economics 42 (2016): 221-237.
Sümer, Beyza. 2018. "Minimum Wage as an Ethical Issue". European Journal of
Multidisciplinary Studies 7 (1): 26. Doi:10.26417/ejms.v7i1.p26-35.
Tilly, Chris. "Living wage laws in the United States: The dynamics of a growing
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Routledge (2015): 143-159.