Disadvantage of Minimum wage

Minimum wage means firms are legally obliged to pay their works at a minimum rate. Although this has been implemented in various different countries, neo classical economists believe that this is a form of price control and will lead to higher unemployment and the only reason this policy being established is more political than economical.

In the supply and demand model, the minimum wage policy creates a price floor and thus, demand will shrink if possible. Note that the demand may not be changed fast enough so that a short term increase in income for most low wage employees may appear. However, in the long run, firms will try to reduce labor in whatever means possible. This will end up with more unemployment.

For example, in the US, back 25 years or so, soda machines were behind the sales counter. After the minimum hourly rate had been increased annually (around the 70s), all fast food stores (such as McD) open up the soda machines and let customers refill themselves.

In HK, most low income jobs are for unskillful workers. All these workers concentrated in services jobs that have been "out-sourced" and services have cut to the bare minimum. If there is a minimum wage law, this will undoubtly let to an increase in wage expenses for firms. Unlike the US or Western countries, HK's wage is too low to be replaced by machines, HK has an abundant supply of unskillful workers and HK has minimum safety net for the unemployed (so that people are more willing to work). Therefore, a minimum wage requirement will increase the wage expenses and lower the competitiveness of HK.

The following website has a good graph illustrating the effect of price flooring:
http://ingrimayne.com/econ/AllocatingRationing/PriceCeilings.html
http://ingrimayne.com/econ/AllocatingRationing/PriceAsRationer.html#PriceFloor




2009-04-08 01:33:40 補充：
http://www.economist.com/research/Economics/alphabetic.cfm?TERM=MACROECONOMICS#minimumwage