Minimum Wage: Rationale, Theory, Problems, and Recommendations

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Minimum Wage
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The rationale behind minimum wage and the theory of efficacy wages
Minimum wage refers to that amount of remuneration or pays that an employer is
obligated to pay his/her employees for the tasks undertaken by the employees within a period of
time and that cannot be reduced by an agreement of the organization and the individual.
Minimum wage is a binding engagement regardless of the manner in which they are set (Ilo.org,
2018). Further, the minimum wage is set by a court of law, a statute or a wage council mandated
to act on behalf of the competent authority.
According to Ilo.org (2018), the rationale behind the minimum wage is founded on the
premise of offering protection to the employees of an organization against exploitation and low
pay by the capital class that does not balance their effort. Minimum wage is the lowest possible
price that an employee can offer for his/her labor. The Australian Industrial Relations
Commission established the Federal Minimum Wage which governs all persons who have
attained the age of 21 years and above and are active in employment. The statutory legislation
which regulates this minimum wage is the Fair Work Act of 2009 (Dana 2018).
The rationale of minimum wage is however not only anchored on protection against
unduly low pay but also focuses on elimination of poverty and reducing inequality in pay and
also on the bias that exists between men and women in areas of employment by promoting and
respecting the right to equal remuneration of labor of equivalent value offered by both men and
women. This is in line with the efficacy wage theory which asserts that the productivity of an
employee in an organization is directly proportional and correlates positively with the amount of
wages they receive (Blackwell, 2018).

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Problems associated with Minimum Wage to the employers and to the economy
Despite the efforts that are put by tribunals, statutes and other competent authorities to
harmonize the minimum pay that an employer can give as a compensation of an employee's
efforts, there are challenges that mar this whole effort, it comes with a number of bottlenecks to
the employers and to the economy at large. The imposition of a minimum wage is known to
disrupt the economic forces of demand, supply and the organizational pricing strategies
(Futureofworking.com, 2018). Imposing a higher minimum wage than the market equilibrium
would affect the pricing mechanism of organizations who would tend to price more so as to
offset the heavy minimum wage bill tied to their neck. This on the negative end would make
employers to lay off many workers especially when the minimum wage becomes a heavy burden
on them, thus leading to unemployment.
The other negative side of the minimum wage is that it can hurt the poor. It is a big
challenge on an employee-side who earns a minimum wage to support a big family on such
meager earnings. Increasing this minimum wage to cater for the needs of the employee and
his/her family would need the employer to increase the employee's earnings but this is not easy
because employers do not set this bare minimum salary.
Unemployment in most economies is also due to the setting of the minimum wage.
According to the efficacy wage theory, the productivity of an employee is determined by the
wages paid to the employee. The employer’s ability to set salary rates depends on the willingness
of the employees to provide their labor. Given that productivity is the key determinant of what
the employers are willing to pay for the labor, an increment of the minimum wage would
adversely affect the employees whose productivity is below the employer’s expectation thus such
employees would probably lose their jobs resulting in unemployment issues.