The concept of minimum wage in economics is define as:
“The smallest amount of money that employers are legally allowed to pay someone who works for them”.
The question of fixing a minimum wage for the workers by a competent authority is gaining importance in every industrial country. The government or the trade union of a country may fix a minimum wage of all the workers on a national scale or in a few sweated industries. This step is taken to avoid or reduce the industrial friction.
Advantages or Merits:
The advantages which are claimed for fixing the minimum wage for the labor are as follows:
(i) Ensures Minimum Standard of Living. If minimum wages are fixed for all the workers, it will ensure minimum standard of living for all of them. The labor will be sure of the reward and they will not be at the mercy of the employers who are always bent upon exploiting them.
(ii) Effect on Efficiency. When the labors are able to maintain the standard of living by the minimum amount fixed by the competent authority, they feel contented and work, more efficiently.
(iii) Inefficient Employers are Eliminated. If an entrepreneur is paying low wages to the workers because he is not able to manufacture the goods at the competitive price, then he may have to close down his concern when the minimum wage is fixed. If such inefficient employers are eliminated from the society, it won’t materially affect the total production of the community. So earlier they leave, the better it is.
Disadvantages or Demerits:
(i) Decrease in Efficiency. When a government fixes a minimum wage for all the workers or in a few sweated industries, then that amount is often considered to be the maximum by the entrepreneurs. If a worker is very efficient, he will not be paid higher wages than fixed by government. It will thus result in curbing the incentive of the workers and thereby decreasing his efficiency.
(ii) Fixation of Minimum Wages a Difficult Affair. It is very difficult to fix a minimum wage for all the workers at different places in a country. For instance, in London, Amsterdam, Bradford and Lords, the cost of living is higher than at other places in England. So at these places, the minimum wages should be fixed higher than at other places. If a higher minimum wage is fixed at one place, then it may not suit the other employers. They may refuse to employ labor or they may try to substitute machinery for labor. If they succeed in their mission, it will, result in mass unemployment in the country. If a minimum wage is fixed low, then it may not serve the purpose for which it is fixed.
(iii) Difficulty in Enforcement. If a minimum wage is fixed, then difficulties may arise in its enforcement. If the labor is unemployed, they may agree to work at a wage lower than that fixed by the government.
(iv) Disorganizations in Business. If a minimum wage is fixed in sweated trades only and not on the national scale, then there will be flight of capital from the former to the later. This will cause disorganization in the whole business.
(v) Unemployment. Another great drawback of fixing the minimum wage is that it can tend to reduce the amount of employment in a country. When minimum wage is fixed, the employers try to increase the prices of the commodities in order to cover their increased labor costs. If the demand for the commodities whose price are raised is elastic, then the total quantity demanded will fall. When the commodities are not disposed off at a profit, some of the firms will close down their businesses, others may reduce the number of the workers. Some of the firms may try to substitute labor saving machines. The result of this will be that there will be greater unemployment in the country.