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Minimum Wage Legislation
One of the most heated topics in Hong Kong - Minimum Wage Legislation
What is Minimum Wage? Does it bring benefits or do harms to the Hong Kong labour market ?If it is implemented, what would be the optimum wage rate? All these questions are discussed in the News and almost all kinds of media, and widely raised by legislators, Government officials, economists, & even the grassroots of HK.
Why is this so important? What kind of economic theories are induced in this topic?
Our group aim to lead this topic into a further discussion, and use well established economics theories to explain it.
In general public view, minimum wage law is good for those with very low wage. This law will help them to increase their wage. By calculation, if minimum wage is set on $30, those with wages lower than $30 will benefit. But in the real situation, that is not so simple. From the point of view of economics, society will be at equilibrium only when Pareto condition is reached which is a maximized condition.
In the Pareto condition, the price and quantity of transaction is in equilibrium. There is no tendency in changing . In a free market, there are no restrictions: sellers and buyers can find their own equilibrium. Which means employees will get a wage that the employers are willing to pay, and the employees are willing to receive. Just as shown in this diagram. P1 and Q1 will be the equilibrium. However, if minimum wage law is implemented, the equilibrium will change and a dissipation of rent will be generated. As shown in the diagram, the new equilibrium will be at P2 and Q2 and the area shaded red will be the dissipation of rent. But why is this part being called the dissipation of rent? This is because the price is fixed at a level higher than the original equilibrium, excess demand exists and non-price competitions will be arisen in order to find a job. Such as shoe shinning, giving presents to the boss and so on. As these kinds of competitions would not benefit anyone, the effort made will be wasted. Besides if the government do not regulate well, black market may emerge. Some labour may be willing to receive a price at P3. This is a price even lower than before, so those poor people may not benefit or they may even be worse off. As shown in the diagram, a firm will decide the quantity of employment according to the MRP of labour where MRP intersects with the wage rate. Therefore, an increase in wage rate will cause the firm to employ a lower quantity with a higher requirement on productivity. Because MRP measures the products of MR and MP. MR is the marginal revenue of the selling goods which cannot be controlled directly by labour, while MP is the marginal product of labour. That’s why a labour can increase his MRP by increasing productivity. If the minimum wage law is set, the number of employment will fall from Q1 to Q2 and the point where W cross MRP will be higher. As a result, those with lower productivity will be surely fired. But those with lower productivity are usually elderly and they are not able to live if they lose their job. Does minimum wage law really benefit poor? We really need to re-think it. While to society, there is a deadweight loss generated, which is represented by the area shaded black in the diagram. Since MV doesn’t equal to MC, more can be gain by the society. But due to the minimum wage law, the part of deadweight loss cannot be gained by anyone in society. Other than dissipation of rent and the deadweight loss, from another point of view, the minimum wage law is actually benefiting those large companies. “Are you kidding?” Maybe you will ask, but no, I am serious. To start with, we need to talk about the effects of minimum wage law to the firms. Due to the increase of wage, the cost of firms will increase. Therefore, the rent of a firm will fall. In a market, there are lots of different firms. Some are marginal firms and some are intra-marginal firms. For intra-marginal firms, they are usually large firms, these firms gain a large amount of rent and these rent may come from brand names, some business secret or they may have some unique plants or machineries. Since rent is defined as the amount that can be taxed away which will not affect the decision making of the firm owner. Therefore, those large firms will not close down since the amount of rent decreased is insignificant to the rent of these large firms. However, to some marginal firms or firms with low rent, the decrease of rent may cause them to have a negative rent, then they will close down inevitably. In this case, a number of small firms will close down. And the competition of larger firms will decrease. Which is quite beneficial to the large firms.
Conclusion
After all these diagrams, explanations & theories, should we let the law pass?
The implementation of Minimum Wage leads to the dissipation of rent, & will induce non-price competition, which in turn causes a higher rate of unemployment.
The findings are supported by economists. After considering the effects of passing the law, Government officials should THINK TWICE before implementing Minimum Wage. At the mean time, in order to protect the benefits of both the employers and labour, economists, or even economics students, try & work out a solution that will lead us to build a wealthy, prosperous Hong Kong.
[ 本帖最後由 monstering 於 10-5-27 08:26 PM 編輯 ] |
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