Answer to Question #173253 in Microeconomics for Ravijeet singh

Question

Suppose the labour welfare (W) in an industry is defined as W = wl, where w = wage rate

and 1= no. of labour hours employed. Assuming a downward sloping demand curve for

labour, show the impact of a minimum wage policy that leaves the labour welfare unchanged.

Answer 1

Under the conditions of a market economy, in the presence of enterprises of formal ownership, the minimum wage is able to fulfill working roles in the reproduction of the working environment: determination and receipt of the minimum volume of material and services necessary for an employee of simple labor, sufficient for this reproduction; to bring such a volume of consumption in line with the available economic potential of the society; serve (for a given volume of material and services produced in the national economy) the most important factor in the real differentiation of wages both in the economy as a whole and in the main qualification groups; influence the stable pay, the proportions in it between the constant parts, intermediaries - the organization of wages at the enterprise; to orient the society to the minimum level of labor productivity, which it has the right to demand from the employee.

Approaches to the determination of the minimum wage. The ratio of the minimum wage to the average level of countries in different countries ranges from 30 to 60%. In the first case, the establishment of the minimum wage ensures that the requirements for workers are met, in the second, on the provision of such a level of wages that allows meeting the needs of workers and families. The minimum wage can also act as a regulator of the entire wage system.

The main criteria for determining the minimum wage are the needs of workers and their families; the general level of wages in the country; the cost of living (consumer basket) and the dynamics of this indicator; the size of social payments and payments; comparative living standards of various social groups of the population; general economic conditions characterizing the development of the country, the level of labor productivity, the state and scale of unemployment.

According to the Labor Code of the Russian Federation, the minimum wage cannot be lower than the subsistence minimum of an able-bodied person.

It should be noted that the subsistence minimum, focused on the minimum permissible consumption of the most important material goods and services for a person, does not provide a complete set of goods and services necessary to meet the primary material and needs. The costs of reimbursement of labor cannot be used to cover the costs of labor, household items, constantly increasing costs of housing, medical care, general and vocational education, social needs of the employee both during the period of employment and after its completion. It is on the basis of calculating the minimum wage that the so-called consumer budget (an expanded set of consumer goods and services), including educational, cultural, and social, more rational expenditures and higher consumption rates, should become in the future.

In consumer budgets, differentiated consumption rates are used (for able-bodied men and women, children, pensioners). Obviously, the definition of the minimum wage countdown should be the minimum budget of an able-bodied citizen. It should also take into account the necessary expenses for the maintenance of disabled family members, statistics on the average size and structure of families. So far, it has not been possible to ensure that the minimum tariff rate meets the subsistence minimum, taking into account the dependency burden. Additional income social payments to families with an average income of one person below the subsistence level provided that all family members are able-bodied.

In the first reforms, when determining the minimum wage, they proceeded only from the possibilities of economic, political expediency, not from its real ratio with the value of the minimum subsistence level, the only measure in determining the minimum wage.

In general, the value of the minimum wage indicator for determining the level and place of wages is generally large. Moreover, in conditions of pluralism of forms of ownership, it is able to play a role in the reproduction of labor, namely:

determine and receive the minimum necessary for the employee a simple volume of consumption of material goods and services, sufficient for this reproduction;

to bring such a volume of consumption in line with the available economic potential of the society.