The Minimum Wage Logic
- georgelawrence
- Oct 17, 2019
- 2 min read
The term 'minimum wage' is often heard in the midst of flaring debates on labour policies. Until recently, I had the wrong idea in mind and so did many others whom I came across on television screens.
David Ricardo was an advocate of free market mechanism. He often spoke about 'natural prices' or as we call it today, the minimum wages.
Ricardo said minimum wage is the wage necessary to enable labourers to subsist themselves. In other words, it is the lowest remuneration that employers can legally pay to their workers.
Don't get it wrong between the terms, minimum wage and market wage. The latter is what the employees are usually paid in any job market. In a free market economy, market wage rates are determined by the demand for and supply of labour.
Why is it important to constitute minimum wages? Because, whenever there arise a situation of an over-supply of labour, the market wage rate may go far below the subsistence level causing starvation and abject poverty among workers.
This is where the Government should ideally chip in; to include a frame work for minimum wage in labour policies.
Around the world, protests organised by workers and trade unions are often seen seeking to increase minimum wages. What they actually mean is an increase in the market wage. The majority are confused between market wage and minimum wage.
On the contrary, it is a dangerous trend for the Government to predetermine a high minimum wage rate. Why? Because this can lead to inefficient allocation of labour resources.
In my opinion, the role of governments should be maintain the balance between efficient working of market mechanism and at the same time, to protect its workers from the wrath of competition. These dual objectives are contradictory but can be fulfilled if the minimum wage is scientifically determined in order to meet only the bare minimal requirements of workers.
References:
Boaz David, The Libertarian Mind.
David Ricardo, The Principles of Political Economy and Taxation.
gov.in/pdf/acts_rules/minimum_wages_act_1948.pdf
nic.in/MW_Report_2012.pdf
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