BUS301: Evaluating Minimum Wage - Arguments and Australian Case

This essay examines the arguments for and against minimum wage policies, providing a comprehensive overview of the economic and social implications. It begins by defining minimum wage and related concepts, then delves into the strengths and weaknesses of implementing such a policy. Arguments in favor include poverty reduction, increased standard of living for low-paid workers, and reduced income inequality. Counterarguments highlight potential unemployment effects and limited impact in developing countries due to informal sector prevalence. The essay further illustrates these concepts with a case study of Australia, evaluating the country's minimum wage system and its effects on employment and living standards. The essay concludes by acknowledging the trade-offs between income support and potential job losses, emphasizing the importance of considering the overall economic context when determining minimum wage levels. Desklib offers this essay alongside a wealth of study tools and resources for students.

Running head: HUMAN RESOURCE ECONOMICS
Human Resource Economics
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1HUMAN RESOURCE ECONOMICS
A. Introduction
Wage is the remuneration that workers receive for their work effort to an
organization. The given remuneration to a worker depends on employee’s contribution to the
productivity. In a free market, the independent forces of labor demand and labor supply
determine wage (Gottheil, 2013). The wage that is determined in a free market is often
insufficient to meet basic demand for workers. Government then intervenes in the market by
setting a legal minimum wage for workers. The minimum wage is a practice of setting a legal
minimum wage, which is above the market equilibrium wage. The minimum wage intends to
protect the relatively low-paid workers in terms of ensuring a minimum income to support
their daily life. Another argument for minimum wage is that minimum wage not only
prevents use of cheap labor but is also encourages efficient use of human resource
(Blackburn, 2016). The essay sheds light on several arguments both in favor and against of
minimum wage. Reference has been drawn for existing practice of minimum wage in
Australia.
B. Definition of minimum wage and the related concepts
Minimum wage can be defined as the amount of minimum remuneration that
employer has to pay the wage earners as a payment of the work performed for a given period.
The fixed minimum wage cannot be altered either by individual contract or by collective
agreement. The definition of minimum wage implies binding nature of minimum wage
irrespective of the methods used to implement those (Rani et al., 2013). A statute, a
competent authority, a wage council, a wage board, industrial or labor tribunals or court can
set the minimum wage. The force of law through the provision of collective agreement can
also set it.

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The main purpose behind setting a minimum wage is to safeguard workers from an
unduly low payment received as remuneration. Minimum wage set by the legal authority
intends ensure an equitable distribution of the fruits of progress among all. Additionally the
minimum wage also helps to ensure a minimum income to all those who are involved in the
employment relation or those are in need of such income protection. Minimum wage is often
seen as a policy measure to alleviate poverty and reduce income inequality in an economy.
Several factors determine the effectiveness of minimum wage. The three important
components of minimum wage include coverage, level and compliance. The minimum wage
should have a wide coverage. Coverage refers to the extent to which the minimum wage can
offer protection to all workers in the employment relation. This include both men and
women, migrant workers, youth irrespective of type of contracts that they are involved
(Ilo.org., 2018). The coverage all implies the extent to which minimum wage covers all the
occupation and related industries. Level refers to fixation of minimum wage to the sufficient
level so that it can cover need of all the basic need of both the workers and their families in
consideration to economic factors. Compliance refers to the fact that whether all the
employers comply with the minimum wage legislation.
C. Arguments in favor of minimum wage
In today’s world, a legislative minimum wage has turned out to be a widespread
practice across the universe. Economists and policy makers support the policy of minimum
wage on ground of several beneficial impact of minimum wage both on the society and on the
economy.
The first argument in favor if minimum wage is that setting a minimum wage
confirms a minimum income to the workers such that they can afford to meet their basic
needs. This in turn increases standard of living of workers. With the increased income,

3HUMAN RESOURCE ECONOMICS
workers can then afford a healthy diet, which improve their state of health. The feeling of a
secured minimum income reduces mental stress and improves health condition (Card &
Krueger, 2015). When workers can afford sufficient food and have a healthy mental state,
they are more productive than otherwise. Minimum wage by pulling up income of low paid
workers helps to reduce income inequality in the society. An associated effect of increase
income and improved health condition is increase in school attendance. This also helps to
reduce school dropouts and hence, contribute to an overall improvement of state of education.
Another supportive argument for minimum wage is its impact on reducing poverty. A
legislative minimum wage is often seen as an effective policy tool to alleviate poverty and
lowering inequality in the distribution of income (Giuliano, 2013). The low paid workers
enjoy sustained gain I income through implementation of minimum wage. In general, there is
an adverse relation between the minimum wage and prevalence of poverty. The latest
statistics on minimum wage in United State support the claim. It has been observed that a
near10 percent increase in minimum wage say currently from $7.25 to near $8 can reduce the
percentage of people living in poverty by approximately 2.4 percent (Washingtonpost.com,
2014). Increasing minimum wage also increases income of people belonging from lower
percentile of the income distribution.
The minimum wage has a beneficial effect on government expenditure as this
contributes to a significant cut in government expenditure conducted to support lower income
household. Implementation of a legal minimum wage boosts income of low paid workers.
This kind of income support however does not require government to spend a single
additional dollar and hence reduces tax burden of households (Reeves et al., 2017). As the
policy of minimum wage is self-enforcing in nature there is no need of additional
administration cost. By reducing excess burden of government spending, such a policy allows

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government to spend more on other programs that can increase standard of living of needed
segments of the society.
D. Arguments against minimum wage
Several counter arguments have been given against the beneficial impact of minimum
wage. The evaluation if minimum wage using economic norms of supply demand and
equilibrium reveals that implementation of minimum wage aggravates the problem of
unemployment in an economy. In any production, labor is used as one of the key inputs in the
production process. Imposition of a binding minimum wage raises cost of labor per hour. As
the labor cost increases, employers reduce their demand for labor. On the demand side, there
is thus a contraction of labor demand (Meer & West, 2016). The increased wage attracts more
people to join the labor force raising the supply of labor. The supply of labor exceeds the
demand of labor leading to unemployment.
Figure 1: Unemployment caused by minimum wage
(Source: as created by Author)

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The above figure explain the labor market scenario to trace the impact of minimum
wage. DD in figure 1 shows the labor demand curve. The supply of labor is shown as SS.
Without any legislative intervention, wage under the free market is set at W* (Case, Fai &
Oster, 2014). Corresponding to the equilibrium, the level of employment is given at L*. If
government imposes a price floor at W1, labor supply increases to L2 while labor demand
reduces to L1. The wedge created between labor supply and labor demand indicates the size of
unemployment due to minimum wage.
The claim that implementation of minimum wage helps to reduce poverty has been
counter argued by the fact that minimum wage has only a modest impact on reduction of
poverty. This is especially the case for developing countries (Leonardi, M., & Pica, 2013).
This is because in most of the developing countries minimum wage is effectively applicable
to only a small fraction of poor workers. Most of the poor workers are engaged in large
informal sector that do not comply with minimum wage legislation. Studies show more than
75 percent of poor workers in these countries are self-employed in the informal sectors and
thus remain less affected by the minimum wage (Wol.iza.org, 2017). As minimum wage is
mostly applicable to the formal sector, the benefits do not reach to the poor.
The critics of minimum wage argue that setting a minimum wage eventually hurts
some low-hung workers whose the legislation actually intends to protect. The opponents
claim that minimum wage is a government imposed artificial value on individual workers. It
is against the notion of standard economic theory suggesting factors of production are to be
paid according to their marginal contribution to the production (MaCurdy, 2015). If
employers has to pay a worker more than its marginal contribution then employers may chose
not to hire. This is particularly the case for young and low skilled workers making them
vulnerable to unemployment.

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E. Minimum wage in Australia
One report as published by the Organization for Economic Co-operation and
Development suggests that Australia possesses the most generous system of minimum wage
among the developed nations in the world. The low paid workers in the nation live in a better
condition than most other nations. This is because of the organized structure of national
minimum wage in Australia.

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E.1 Implementation of minimum wage in Australia
Minimum wage refers to the base rate pay of employees for ordinary work hours. The
minimum wage in Australia is dependent on industrial instrument applicable to the
employment. For example, a registered agreement or a modern award. By the law, employees
and employers cannot paid lower than the set limit even if they are agreed to do so. Each
year, experts in the panel of Fair Work Commission review the minimum wage that
employees receive in the workplace relation. The review of minimum wage include takes into
consideration written submission received from interested parties, consultation before the
expert panel and research conducted by the expert panel. After the panel discussion review, a
national minimum wage is set which is effective from first full pay period or after 1st July
each year. The national minimum wage is currently set at $18.93 per hour. On weekly basis,
the minimum wage is $719.20 per week with working hours of 38 hours (fairwork.gov.au.,
2019). The national minimum wage order determines minimum wage for employees who are
award and agreement free. The wage order has responsibility set wages such as a national
minimum wage, special minimum wage for trainees, apprentices, employees having a
disability or junior employees and a casual loading. Employees covered under a modern
award include wage for adults, wage rate for juniors, employees to whom training
arrangements apply, employees with disability, piece rates and casual loading.
E.2 Evaluation minimum wage in Australia
The evaluation of minimum wage in Australia reveals both favorable and unfavorable
effect of minimum wage practice on different sectors of the economy. Imposition of a legal
minimum wage leads to an obvious trade-off between increase in income of lower segment of
income group and poverty reduction and that of a contraction in employment level increasing
unemployment (abc.net.au, 2019). The Fair Work Commission promotes a higher minimum

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arguing that such a higher wage does not have any adverse effect on employment. The
experts believe that higher minimum wage actually supports a higher income for low paid
workers and raises their living standard. Determination of minimum wage however depends
on health of the economy. The positive economic outlook of Australia has allowed the
commission to raise minimum wage by 3.5 percent, pushing the wage to $18.93 per hour
(Knaus, 2019). The current economic condition is supportive to increase the living standard
of poor people with the aid of minimum wage. The economic indicators of Australia suggests
a healthy condition of national economy and the labor market. The 3.5 percent increase in
wage is higher than the inflation rate of 1.9 percent indicating a higher real wage and
improved living standard (theconversation.com, 2019). Studies on Western Australia
however revealed that the minimum wage legislation has adversely affected employment
creation in the region (abc.net.au, 2018). One advantage of minimum wage policy in
Australia is that the minimum wage policy has sliding scale that is minimum wage tends to be
lower for younger workers compared to wage levied on all age groups (Berg, 2019). The
sliding scale has a less damaging effect compared to a high flat rate. The minimum wage
policy often aggravates the problem of poverty by preventing low skilled poor workers to
enter the labor market (abc.net.au, 2019).
In sum, minimum wage legislation in Australia is a widespread practice targeting to
improve living standard of poor people. Given a stable state of the economy, an increase in
minimum wage above inflation rate raise real wage of workers resulting in an income gain.
Besides the positive effect of minimum wage, the policy is often contested because of
adverse effect on unemployment and poverty.
F. Conclusion

9HUMAN RESOURCE ECONOMICS
Minimum wage is defined as a legal minimum remuneration as set by a legislative
authority. It is a form of binding price floor setting wage above the free market equilibrium
wage. The successful application of minimum wage depends on it coverage, level and
compliance. The first supportive argument for a legal minimum wage is that is confirms a
sufficient minimum income for the workers. The increased income has a positive association
with the state of health and education. The minimum wage legislation helps to reduce poverty
by lowering income inequality. As minimum wage does not involve any administrative cost
neither it involves any additional cost burden, it lowers burden on government spending.
Besides the potential beneficial effect of minimum wage legislation, the concerned policy is
widely criticized because of increasing unemployment, relatively modest impact on poor and
hurting poor workers. The Fair Work Commission in Australia is responsible for determining
minimum wage in the nation. The evidence shows both favorable and unfavorable effect of
legislated minimum wage in Australia.

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Reference list
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Berg, C. (2019). Australia's minimum wage prevents people from getting a job. Retrieved
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Blackburn, S. (2016). A Fair Day’s Wage for a Fair Day’s Work?: Sweated Labour and the
Origins of Minimum Wage Legislation in Britain. Routledge.
Card, D., & Krueger, A. B. (2015). Myth and Measurement: The New Economics of the
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Gottheil, F. (2013). Principles of macroeconomics. Nelson Education.
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poverty. Retrieved from

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https://www.washingtonpost.com/news/wonk/wp/2014/01/04/economists-agree-
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