Effects of minimum wages on unemployment

Question

Unemployment and Minimum Wage Theories and Principles

How does the minimum wage or living wage affect unemployment?

What are the objections? Can minimum wages reduce unemployment?

Answer

There are many theories and principles that explain unemployment and minimum wages. According to the classical method proposed by Pigou and Solow, the labor market depends on the supply and demand of labor. According to Pigou’s theory of unemployment, the latter (unemployment) is caused by lack of information, the nature of the labor market and the search for new jobs (Di Matteo 2016). The ILO defines the minimum wage as a fixed amount that employers must pay their employees. Nearly 90% of ILO member states have a minimum wage (Harasztosi and Lindner 2019). South Africa is a developing country with an unemployment rate of up to 36%. Low wages for working people will not solve the unemployment problem. Even if a minimum wage doesn’t solve the whole problem, it will at least benefit the poor. This essay aims to show that the minimum wage causes unemployment.

Besides the minimum wage, other factors influence the unemployment rate in a country. Whether the minimum wage affects employment is a widely debated topic in economics. Due to the recent recession, the employment rate of young people and low-skilled people has deteriorated. Minimum wage affects employment. Two issues arise when considering minimum wages. First, minimum wages are set at the state level, and second, their actual impact on employment outcomes is not always discrete (Grimshaw 2016). Unemployment has frictional and structural causes. One cause of frictional unemployment is employees voluntarily leaving an organization. Second, college graduates seek jobs that match their skills and qualifications (Martin 2017). Third, advanced technology has replaced the labor force with computers and machines. Finally, unemployment occurs when the number of applicants exceeds the list of jobs offered to workers (Murtin and Robin 2018). A fixed minimum wage is harmful to workers and fails to protect and meet their needs. Some theorists say minimum wages will be introduced by governments to create value for workers. For example, if a person is hired as a machinist, management will pay him less than other workers because he knows he will not be as productive as more experienced workers. . A good option for fighting the disease of unemployment. As noted economist Warren Buffett has pointed out, minimum wages increase unemployment because employers are unable to hire new candidates and outsource work previously performed by low-wage workers. This is because the incentive to outsource increases. While unemployed, the state has to spend more money on unemployment benefits, and the state receives lower taxes. Unemployment will continue to lead to crime, social exclusion and vandalism. Economists believe that full employment cannot be achieved without inflation. Employees should be provided with strong incentives for retention. Minimum wages also lead to inflation (Brummund and Strain 2018). If an employer raises the minimum wage for its employees, it is obligated to raise the cost of its products on the market to offset that cost. This is what some economists believe is the worst possible pushback for inflation. Fixing a minimum wage can result in layoffs of employees, resulting in unemployment. Businesses will also be forced to close. And when the minimum wage is raised, many adults and young people will lose their jobs because they are the beneficiaries of these policies (Meer and West 2016). Minimum wages reduce employee benefits and may increase tax liability. Employers may outsource work to locations with lower labor costs. Therefore, minimum wages have a significant impact on unemployment rates. But other factors also affect a country’s unemployment rate. South Africa has the highest unemployment rate. However, South Africa now enjoys a democracy that includes free economic flows and employment opportunities. However, it still lags behind other developed and less developed countries (Anand, Kothari, and Kumar 2016). One of the causes of unemployment in South Africa is the poor education system. The deliberate exclusion of South Africans from the education and employment system during the apartheid era resulted in high unemployment. The education system cannot teach the skills needed for the labor market. Another factor contributing to unemployment in the country is a decline in jobs and an increase in applicants. Women are entering the labor market, especially in Africa, but are unable to find jobs that match their skills. The global recession of 2008 and 2009 put many workers out of work, especially in manufacturing. Firms could no longer retain their employees, ultimately leading to unemployment in the country. Some researchers argue that South Africa’s employment requirements are making the government more rigid, while others argue that a living wage would improve employment conditions. The government has also failed to respond. The National Development Plan calls for all South Africans to take collective initiative and recognize the importance of reducing unemployment. Only 12% of African men and women work compared to 14% of white men and women. Advances in technology have put many people in Africa out of work who rely on agriculture for their livelihoods (Aucoin and Cillier 2016). High wages in settlements in Africa are also one of the reasons people choose to stay at home. A reservation wage is the minimum wage at which a person is willing to work (Le Barbanchon, Rathelot, Roulet, 2019).

Factors Affecting Unemployment

Figure 1: Unemployment Ratio in South Africa

The South African government has introduced a national minimum wage policy, but needs to consider certain issues when making recommendations, such as maintaining the importance of the minimum wage, market productivity, employment alignment and employer capacity. There is Successful business with IT. A minimum wage will help reduce poverty and inequality in South Africa. Inequality in the country is due to wage gaps (Chikozho 2016). A minimum wage at least helps workers compete on an equal footing in the labor market. However, other factors should also be considered. South Africa’s education system needs improvement, which will increase employment opportunities both within and outside its borders, thereby reducing structural unemployment. People need to be educated because good education qualifies the workforce. Apprenticeships are meant to provide the unemployed with the skills they need to find new jobs. We need to develop monetary and fiscal policies that increase aggregate demand and lower taxes. To further reduce unemployment, the minimum wage must be lowered. In addition, we need a good labor market to hire workers. If aggregate demand increases, GDP will also increase. Similarly, when the economy grows strongly, companies are less likely to go bankrupt. Another way to reduce unemployment is to reduce the growing influence of trade unions in the market sector. Companies should receive loans and subsidies to hire the long-term unemployed. This increases the confidence of the latter. However, it can be expensive. Governments should take measures for the unemployed that benefit both the unemployed and the employers. Economists say the minimum wage may not cover the cost of living. The main problem with the minimum wage is that it’s not fixed. Customs duties vary by state and province. The South African government is now trying to give tax breaks to large organizations to allow them to set up businesses in crisis areas. Developing countries like South Africa should not rely solely on minimum wages to reduce unemployment. Because this is not always successful. African legislatures should encourage entrepreneurship and innovative ideas for product development and market demand that create job opportunities. Job opportunities are increasing in South Africa. Therefore, countries should pay attention to the above factors to reduce unemployment in the region, as minimum wage can cause unemployment in many underdeveloped countries.

Impact of Minimum Wages on Employment

Figure 2 Growth of Employment in South Africa over the years

Raising the minimum wage can lead to job losses, especially for low-skilled workers. The minimum wage associated with the organization he leads to unemployment in two ways. First, employers will consider replacing less skilled workers. Second, new input mixes and rising wages reduce demand for products and labor (Neumark D 2018). Sometimes the reasons for introducing a minimum wage are not entirely clear. Minimum wages are generally raised when the labor market is tight. But raising the minimum wage, while masking the negative effects of the minimum wage, could have a positive impact on surrounding states. Because the labor market is so complex and experienced workers have so many skills, when minimum wages are set, employers automatically prefer lower-skilled workers in favor of highly-skilled workers. employment will be reduced. The US minimum wage is determined by labor and other state laws.

However, minimum wage policies have historically been used by countries around the world to intervene in markets and regulate wages and working conditions. The theory of introducing a minimum wage policy to meet the needs of workers is widely accepted by all and is now part of international law. Some theorists argue that minimum wages reduce unemployment. Raising the minimum wage makes workers more productive. Employees’ morale increases when they believe they are treated equally at work. It also helps improve the mental and physical health of employees. Minimum wage policies also reduce turnover and reduce training and recruitment costs. This will further boost the economy of the state as a whole. The minimum wage has resulted in job losses, but many policy makers have tried to raise it for years. Some minimum wage proponents argue that minimum wages help families lift themselves out of poverty and that the purchasing power of workers boosts local economies (Dube 2019). Supporters of the minimum wage also believe it has a positive effect, because more money means more spending, which automatically increases economic activity. Raising the minimum wage increases demand and creates new jobs for workers. As wages rise, tax revenues also rise. It also helps families cope with rising inflation. Some proponents say that if workers and employees were paid a minimum wage, they would be less dependent on government programs for well-being. Minimum wages also help reduce inequality. But raising the minimum wage always has more negative effects than positive effects. When tackling unemployment, factors other than minimum wages also need to be considered.

Argument against Minimum Wage

In conclusion, minimum wages do not necessarily help workers and nations. It can be used as a short-term remedy, but it may not have any effect in the long term. Minimum wages have a big impact on unemployment. It reduces personal self-growth and further leads to poverty. But this is not the only reason for unemployment around the world. Other factors such as poor education, inequality, ineffective government policies and geographic recession can also contribute to unemployment. Similarly, solving the minimum wage problem is not enough. To solve the problem, it is necessary to consider all the problems that lead to unemployment. Pros and cons of minimum wages suggests that minimum wages can help improve employment opportunities, depending on how government policies are implemented. Expanding education and expanding medical facilities help raise capital and contribute to employee growth and performance. Services such as finance, trade and insurance also offer employment potential. Unemployment is a serious problem, so some output growth will have to be sacrificed for more job opportunities. Governments should take concrete steps to promote the decentralization of industrial activities. Therefore, we should take positive steps to combat the evil of unemployment.

References

Anand, R., Kothari, S. and Kumar, N., 2016. South Africa: Labor market dynamics and inequality. International Monetary Fund.

Aucoin, C. and Cilliers, J., 2016. Economics, governance and instability in South Africa. Institute for Security Studies Papers, 2016(293), pp.1-24.

Brummund, P. and Strain, M.R., 2018. Does Employment Respond Differently to Minimum Wage Increases in the Presence of Inflation Indexing?. Journal of Human Resources, pp.1216-8404R2.

Chikozho, C., 2016. The disjuncture between economic growth, poverty reduction and social inclusion in South Africa. Inclusive Growth and Development Issues in Eastern and Southern Africa, pp.109-138. 

Di Matteo, M., 2016. Towards a rational reconstruction of Pigou’s ‘Theory of Unemployment’. In Research in the History of Economic Thought and Methodology (pp. 339-356). Emerald Group Publishing Limited.

Dube, A., 2019. Minimum wages and the distribution of family incomes. American Economic Journal: Applied Economics, 11(4), pp.268-304.

Grimshaw, D., 2016. Minimum wage. Edward Elgar Publishing Limited.

Harasztosi, P. and Lindner, A., 2019. Who Pays for the minimum Wage?. American Economic Review, 109(8), pp.2693-2727.

Le Barbanchon, T., Rathelot, R. and Roulet, A., 2019. Unemployment insurance and reservation wages: Evidence from administrative data. Journal of Public Economics, 171, pp.1-17.

Martin, F., 2017. The influence of unemployment insurance benefits upon the social cost of labor in lagging regions. In Regional Economic Development (pp. 244-268). Routledge.

Meer, J. and West, J., 2016. Effects of the minimum wage on employment dynamics. Journal of Human Resources, 51(2), pp.500-522.

Murtin, F. and Robin, J.M., 2018. Labor market reforms and unemployment dynamics. Labour Economics, 50, pp.3-19.

Neumark, D., 2018. Employment effects of minimum wages. IZA World of Labor.