10/16/12: Misinterpretation

The distribution of wealth among individuals plays a significant role in the economics of a country. A commonly debated and misinterpreted concept is whether or not minimum wage serves its purpose. Originally, minimum wage was instituted to provide workers with an adequate standard of living. On the other hand, many policymakers have been concerned about minimum wage corresponding to market distortion.

By definition, minimum wage is “the lowest wage payable to employees in general or to designated employees as fixed by law or by union agreement” (dictionary.com). In other words, minimum wage is a price floor in economic terms. When a price floor becomes binding in an economic market by existing below the equilibrium price of the intersection of the supply and demand curves, it generates a surplus. It is a common logical fallacy to assume that a surplus is always associated with a benefit to society. Surprisingly enough, individuals are not aware of unemployment being considered as a potential surplus due to changes in minimum wage.

When minimum wage increases due to government regulations, labor surplus or unemployment exists as the number of individuals searching for work exceeds the maximum amount of positions available/demanded by companies. Consequently, a dead weight loss of jobless individuals exists who would have had the opportunity to acquire jobs if the minimum wage was not raised above the initial equilibrium. In addition, an increase in minimum wage raises the costs of corporations by paying their workers more, which results in a significant downsize of their company in order to preserve their revenue and profit. Moreover, there are many secondary consequences. For example, many teenagers are attracted to drop out of school and begin displacing other people who are unskilled workers.

Society should become educated to comprehend that a direct relationship exists between minimum wage and the necessary living wage. The government should consider alternatives to solve this social conflict.

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