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The critical role of minimum-wage laws

The effect of minimum wage laws to unemployment has received both political and academic attention over the years. While most developed countries such as the United States have had federal laws on minimum wage as well as different state laws, some countries such as Australia have managed to stay behind in enacting such laws. Introduction of minimum wage laws and implementation have impact on the demand and supply of labour and subsequently on the working hours. Young people are usually most affected by the impacts of minimum wage laws because of their tendency to work part-time usually because they study. Although, there have been temporary loss of employment from the introduction of minimum wages legislations world over, studies show that this is only temporary and in some cases unemployment from these legislations can be disputed.

When the minimum wage rises, the quantity of labour demanded by employers declines while the labour supply increases as more people are willing to work for a higher pay. What happens then, is that the invisible hand of the market as described by Adam Smith takes over to offer equilibrium where both employers and employees find the balance. This balance is usually more beneficial to employees who can have greater benefits from their work. The employers tend to prefer full-time employees when the minimum wage is higher and so employers become more open to discuss more stable working terms for the previous part-time young people and mothers. Unless, the federal and state governments intervenes to introduce and make minimum wage laws, the labour markets would not normally start the process and so the need for legislation.


By Haze
By Haze





Eco-entrepreneur and a Project Manager in Auckland, New Zealand.

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