Economics Project

Minimum Wage

Minimum Wage• Since 1997, the economy downturn

in Hong Kong leads to the rapid increase of unemployment rate. Especially the low income families they faced the cutting of income and the reduction of staff.

• As a result, the minimum wage policy is proposed to protect labours from being exploited.

Minimum Wage

An effective minimum wage is set above the market equilibrium so it will lead to an excess supply of labour.

Wage Rate• Wage=MRP• Wealth maximizing condition: MRP=MFC• Wage rate is a kind of market price. Under

competitive constraints, employers must offer “suitable” wages to workers, and these “suitable” wages are measured by contributions (productivity) of workers.

• Productivity of workers having higher level of education and more experience is higher.

Wage rate• Wages increase as workers’ seniorities. The

more years the workers work, the higher wage they receive.

• However, workers’ wages do not reflect their productivities.

• Give civil servants as an example: a newly entered civil servant receives $10000/month, while another who has worked for 5 years receives $35000/month. However, their responsibilities are more or less the same. It shows that the workers’ wage do not in proportion to their productivities. Their wage are determined by their seniorities.

• Therefore minimum wage rate can protect the labour who lacks experience from receiving a very low wage.

More About Wage Rate• Substitution effect:

wage ,a person will work longer because of the increased opportunity cost of leisure time.

• Income effect: wage ,a person can afford to work less because he can earn more income than before without working more.

Question&Answer• Q1: After carry out the

minimum wage policy, the total output of the country will??

• Ans: Decrease. It is because the higher than wage, the lower than quantity demanded for labor force. Labour demand curve is downward sloping. The decrease in labour force, of course, leads to the decrease of total output.

Question&Answer• Who will lose their job under this

policy?

• Ans: Low Productivity --The labour whose marginal product revenue lower than the minimum wage will suffer most. It is because minimum wage is always imposed above their productivities: the teenagers who lacks work experience

Advantage of minimum wage

• This can increase the market consumption because people have higher income and faster the recovery of economy. Also when the wage is too low, people will prefer unemployment other than having a job. Therefore the minimum wage can encourage more labour to enter the labour market.

Disadvanges of minimum wage

• Under this policy, the employees are forced to increase the wage of labour so their production cost is higher. As a result, some employees will use more machines rather than employ the labour.

• Choice of different contractual arrangements depends on

• -how risk is shared

• -the transaction costs involved in the arrangement

• Proxy payment ( e.g.. Time rate )

• Reason: it is hard to measure one’s contribution

• Risk: bear by producer because no direct linkage between output and wage

• Problem: shirking problem

• Cost: monitoring cost

Group Members Chan Ping Ying 6A (1)

Leung Sze Wing 6A (7)

Man Chui Ying 6A (9)

Y u ka Yan 6A (14)

Yu Kam Fa 6A (15)