Mgsm 845 - Economic Context of Management

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Economic Context of Management

MGSM845

Dr Lyla Zhang 

Introduction

As per the International Labour Organization (ILO) Minimum wages are defined as “the minimum amount of remuneration that an employee gets from its employer for the work performed during a given period, which cannot be reduced by collective agreement or an individual contract”

This definition refers to the binding nature of minimum wages, regardless of the method of fixing them. Minimum wages can be set by statute, decision of a competent authority, a wage board, a wage council, or by industrial or labour courts or tribunals. Minimum wages can also be set by giving the force of law to provisions of collective agreements.

As per the ILO, these laws determine a base level of wage rate that the employers have to pay to their workers/labour for the work they get from them. Currently the minimum wage rate for an employee in USA is $7.249. Whereas in United States, some states have minimum wages set of their own, these states do not fix minimum wages as per the federal government. The states in USA are categorized into 4 different categories:

1. States with higher min wages than federal govt.
2. States that match the govt. minimum wage.
3. States with undefined minimum wages.
4. States with lower min wage as compared to the wages defined by the federal government.

**In certain cases when an employee is entitled for both the types of minimum wages i.e. state and federal, then the employee will receive the higher one out of the two.

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Corporate Profits Vs Labour’s Share[pic 8]

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As you can see, corporate profits are skyrocketing while labor's share of those profits is falling. This is a big part of the reason that median wages are stagnating even as the economy grows and the wealthy become ever more fabulously rich.

There are many explanations for why labor's share of income is falling. Globalization, automation, skills-based technological change and the decline of unions all play a part. But in the end, all these explanations end up saying the same thing: Most workers have less power to negotiate raises than they did a generation ago. And that's truest for those who making the least money and holding the fewest skills.

On the other hand, if we consider the demand and supply curve minimum wage results in various problems in the labour market by altering the demand and supply curve and putting immense pressure on the government resulting in a financial burden on the government. This can be seen below, by the dead weight loss catered by the government.

There are many reasons that support the implementation of minimum wage in India and some of them are:

1. General People Perspective

1. Better quality of life: Minimum wages empowers the informal sector of workers to earn and seek a better lifestyle.
2. Motivation: Getting paid more is always a motivation for the workers, it’ll increase the productivity and efficiency of labour.

1. Government Perspective

1. Poverty Reduction: Minimum wages will help the people living below poverty line and make them self-sustainable.
2. Increase in Income Equality: It will help the government to collect more money from the employers for the extra services employers get from their employees.
3. Rise in spending Capacity: When people will start earning more, then the spending capacity will also increase, thus leading to increased revenue for the government.
4. Reduction of Government support to unemployed – By implementing minimum wage, workers will get motivated and look for more employments, which will decrease the government’s expenditure in supporting the unemployed and below poverty line workers.
5. Increase in Tax Pool for Government:  Due to increase in spending power, this will lead to more tax generation to the government and also if the employees are paid more then, the income tax paid by the workers will also increase.

1. Business Perspective

1. Increase in industry workforce: More money means more workers, when workers are given more money, it motivates more people to work in the industry which will help in the increase in labour in the market.

Apart from all these reasons which support implementation of Minimum Wages in Indian, there are several demerits comes along with it and some of these are listed below:

1. General Worker Perspective

1. Increase in Unemployment: Increase in wages will result in increased labour costs in total for an industry. This is force the companies to spend one-time fee for streamlining their business operations over the recurring cost of increase wages. This phenomenon will lead in loss of jobs as a whole.
2. Decreases chances for Individual Development: Workers who work on minimum wages are mostly the informal workers i.e. workers will have limited skill set or no skill set at all. When these workers will be paid more money, there will be no motivation for them to develop their skills, which will increase the no. of skilled workers in a longer run.

Source: (Futureofworking.com, 2014)

1. No Benefits in Job: Implementation of min-wages will force the employers to pay more to their employees, this increased cost will be covered by employers by reducing the overall employee benefits.
2. Employee Abuse: Higher wages will lead to high availability of labour, employers will have more options to choose from. This will give employer more bargaining power over the workers and power to exploit them.

If we take a scenario when minimum wage is greater than equilibrium wage, the initial demand for labour is QE at the equilibrium price of PE, the point where the demand and supply curve intersect.

When Minimum wage is introduced the price changes to PMW, there is a rightward shift in labour supply to Q2. Companies would be concentrating on reducing costs to the companies and the demand for labour reduces to Q1. Therefore, the dead weight loss is the possible employment which wasn’t achieved as labour market didn’t reach equilibrium.