MNIMUM PRICES (PRICE FLOORS) AND MINIMUM WAGES
Minimum price by definition is the price fixed by government below which it is illegal for a commodity to be bought or sold. Governments sometimes pass laws stating that certain goods and services cannot be sold below some stated minimum price. In many countries today, there are minimum wage laws specifying floors for the wages to be paid to different kinds of labor. Resale price maintenance, which exists in many countries, gives the manufacturer power to prevent the retailer from the prices that are set by the manufacturer. If the purpose of minimum price is to protect the interest of producers (which is normally the case) by increasing and stabilizing their income thereby encouraging the producer to produce more, then they must always be fixed above the equilibrium price. The equilibrium price is the price at which demand and supply are equal.
Price floors have their own effects. If the price floor is above the equilibrium price, quantity demanded will decrease but quantity supplied will increase resulting in excess supply or surplus. With the surplus, producers may be tempted to reduce price and sell below the set minimum price in order to dispose of their stock. This reduction of price on the side of producers may however, discourage them from producing more, and the effect could be detrimental to society by causing a shortfall in output. To keep the minimum price from falling, the government should purchase the excess supply. This is a case of the government operating a buffer stock. A buffer stock is an organization aiming to stabilize a commodity market. It buys when the price is low, stores and sells when the price is high.
MINIMUM WAGES AND THEIR EFFECTS
Minimum wage is the wage fixed by the government, so that paying a worker below this wage is illegal. Minimum wage is usually fixed above the equilibrium wage rate. They are fixed by governments for a number of reasons. The reasons include the following:-
1. They may be fixed to check the injustices that the invisible forces of demand and supply may create. If these forces are allowed to operate on their own, workers whose services are in low demand will be offered very low wage by their employers. The government in order to maintain social justice may fix minimum wages.
2. To protect the lowest income earners against high cost of living.
3. They may be fixed in order to induce workers to boost production.
4. Minimum wages may be fixed in order to raise the marginal propensity to save, especially when the general level of savings is low.
Effects of Minimum Wages
1. The fixing of minimum wages above the equilibrium wage rate, causes the supply of labor (number of those who want to work at the going minimum wage) to increase. This is because those who did not want to work at first will now want to do so at the going minimum wage. The demand for labor (the number of workers employers will want to hire), however will decrease. This is partly because with the minimum wage, employers reduce the number of their employees to cut down on the cost of production. The cumulative effect is an unemployment problem. Minimum wage legislation therefore, create a surplus of labor which is actively seeking employment but cannot get jobs to do.
2. The rise in wage increases cost of production. The producer aiming at maximizing profits will increase the price of the final product. Minimum wage will therefore increase prices of final goods and services.
3. Employers may substitute capital intensive methods of production for labor. This is because price of labor has increased. This situation may lead to increase in capital imports.
4. The increase in the cost of production due to rise in the wage rate can reduce the level of production. This is because fewer workers are now employed. The national income will also fall.
5. Most of the unemployed may offer their services secretly below the equilibrium wage rate in order to survive.
Minimum wages may therefore, fail to safeguard the interest of workers, may create situations where workers are laid off and even provide an avenue for workers to offer their services at wages below that determined in the free market.