According to The Star News: ‘Addressing issue of minimum wage’,
government in Malaysia is now come out an Act which to protect the worker. It
stated that employees’ wages must reach the minimum of RM 900 per month
starting from next year.
After this Act has been made from
government in Malaysia, there will be a surplus of workers in a market. In this
situation, we assume the workers are employee, while the people who are hiring
a worker be producer. When wages of employees increases; there will be a
decrease in demand of employees. As we all know the law of demand stated that
when other influences remaining the same ‘the higher the price of a good, the
smaller is the quantity demanded’. In the other hands, the law of supply also stated
that ‘the higher the price of a good, the greater the quantity supplied’.
Because of the nature of human behavior, consumer is not willing to accept
things which are price higher than what there expected.
Government has done some survey
before forming this Act to make sure this can reach the market equilibrium. Market
equilibrium is the situation in which opposing forces balance each other.
Market equilibrium occurs only when the price balance the plans of buyers and
sellers. In market equilibrium, price is at the level which quantity demanded
equals to quantity supplies. In market equilibrium, price will automatically
adjust lower when there is a surplus.
To
make sure the wages of employees are accepted by employee and producer, a price
floor of wages should put in this market. A price floor is a regulation that
makes it illegal to trade at a price lower than specific level. After this
price floor applied to labor markets, it is knows as minimum wage. Price floor
which set below the market equilibrium price will never bring any effect to the
labor market. Therefore, price floor or minimum wage should put above the
equilibrium price so that it can affect this market. If price floor is set
above the equilibrium price, the quantity of labor supplied exceeds the
quantity of labor demanded. This situation is what I had mentioned in paragraph
2, Surplus. Because of the minimum wage, this will create a high unemployment
rate. After a minimum wage is set above the market equilibrium price, a
deadweight loss will arises.
The black area in the graph above shows the opportunity cost when
consumer and supplier are doing job search when there is a price floor. When
the government involve in setting a price floor in labor market, consumer is
not willing to hired employees with high wages, so they will do some research
activity to find some employees who is willing to work with them in a lower
wages. In the other hands, when the quantity demanded of employees is low,
employees who are looking for a job will be doing job search also looking for
consumer who is willing to pay higher wage to employ them. When suppliers and
consumer doing this research, petrol expenses, phone bills expenses and time
expenses will become the opportunity cost. The red triangle area shows the
deadweight loss. A deadweight loss is a loss to society. In this situation,
this deadweight loss is the loss of workers.
The sum of the black rectangular
area and red triangle area are the total loss. The sum of this two areas are
the deadweight loss and the opportunity cost when workers and producer are
doing research on searching.
After the government forms this Act
to set the minimum wage, there will be an underproduction of workers because
the marginal social benefit is exceeds the marginal social cost. The reason why
there is an underproduction because those workers are the input of production
process.
In this situation, there will be a
black market incurs. Black market is an illegal market that operates alongside
a legal market in which a price floor or other restriction has been imposed. A
surplus of workers creates a black market in employee. Illegal arrangements are
made between the workers and employers at the wage below the price floor. When
there is a black market occurs, as a producer who is looking for minimum cost
will be doing some research activity to look for workers who are willing to
work for them at the price below price floor. Vice-Versa, when a minimum wage
is form, unemployment rate getting higher, so as a worker will do some research
to look for job who is willing to hire them at the lower wage.
In microeconomics, citizen will ask
is the minimum wage fair enough to everyone? As an economist, the answer is NO.
Because most of the economists believe that the minimum wage brings high
unemployment rate to low-skilled younger workers. Thus, the minimum wage raises
the incomes of those workers who have jobs, but it lowers the incomes of those
workers who cannot find jobs. The impact of the minimum wage depends on the
skill and experience of the worker. Workers with high skills and older
experience are not affected because their equilibrium wages are well higher
than minimum wages. For these workers, the minimum wage is not binding. If the
quantity demanded of worker is more elastic, it might have a bigger rate of
unemployment compare to a free labor market.
In conclusion,
opponents of the minimum wage contend that it is not the best way to combat
poverty since it affects only the income of those in employment and may raise
unemployment. Additionally, when the unemployment rate is high, this might
increase the rate of crime in the nation because citizen cannot afford to live
without income.
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