Answer to Question #108458 in Management for Kumar Peddi

Question

In some countries a national minimum wage or a “living wage” has been set by the government. What are the drawbacks of such an approach to dealing with low pay

Answer 1

Firstly, a high minimum wage can cause price inflation as firms pass on the higher wages at higher prices. Additionally, a high minimum wage can results in falling employment due to the contraction of demand and rising unemployment as supply extends. Most significantly the minimum wage causes changes in the economy which causes the labor to become inflexible.