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0px}span.s1 {font-kerning: none}The 30% increase in minimum wages over 2 years (1st year: 20.7%; 2nd year: 6.67%) decided by the regional government of Ontario (Canada) illustrates how government intervention can affect supply and demand for a factor of production. This measure will impact the stakeholders in different ways. Two terms to help understand this topic: Labour demand: The need for employees and workers in a particular market such as manufacturing.
Labour supply: Availability of suitable human resources in a particular labor market.As the government increases the wages, the labour demand decreases. We can show it using a diagram: The change in price causes a movement along the demand curve. Both curves are the effective demand and supply curves.
They reflect the willingness and ability of both workers and producers to offer a given quantity of the considered factor (labor) at a given price (wage). The price increase is a positive income effect for the workers and a negative cost effect for the producers. For existing workers, the positive income effects increase their purchasing power. For producers, the wage hike increase their production cost and decrease their profit margin, ceteris paribus. The law of supply states that as the price of a product increases the quantity of the product supplied will rise, ceteris paribus.
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s1 {font-kerning: none}When the firms increase workers wages’s, their profit margin will fall. We can show it using a diagram: People on minimum wages are considered cheap labour market, that’s the wages paid for non qualified jobs.in fact, it changes the equilibrium for cheap labor markets. Without government interference, the equilibrium quantity demanded and supplied would be Qe, at a wage We. The government imposes a minimum wage of Wmin in order to increase the revenue of the low paid workers. However, at Wmin, only Q1 will be demanded because it rose, but Q2 will now be supplied. Thus we have a situation of excess supply.
If the government doesn’t intervene, the labour demand will fall. The government objective is to raise income for low earners. It wants workers to earn enough to have a reasonable lifestyle.
Will this action achieve its intended goal? There are different stakeholders in that context: the workers (directly affected by the change in wage), producers (they make the decisions on production factors usage), the consumers (if firms decide to raise the prices of its goods) and the government (as the workers incomes increase, they will be able to spend more thus increasing the government tax incomes). The changes in the supply and demand curves are not reflected immediately on each of them, there can be a time lag. In the short term, the wage increase takes place immediately.
Low earning workers will see their income rise, their consumption will increase, their lifestyle will benefit from this. By increasing the minimum wages by such a large amount, some people who previously were earning more than the minimum wage will now find them self at the lower end of the wage spectrum. By its intervention, the government flattens the producers salary structure. This could lead to social conflicts. The government will see its tax revenues rise from the increase of private consumption. Producers will react with a lag and prices may stay still in the first phase, consumers will not be affected. Firms have to make decisions regarding the use of their production factors in this new context, it will take some time for them to implement them. In the long term, producers make decisions about what to supply based on rational expectations of futures prices.
Producers want to maximise their profit, the wage increase will cut into their profit. They will try to offset this by taking various actions: reduce the number of workers, substitute low skilled labour with automated machines, relocate their production to a cheaper country (delocalisation) or they can raise their selling price; this might not be possible as it could price them out of the market because of cheaper substitutes. The production function changes will impact the other stakeholders. The demand for low skilled workers will decrease, it will be harder for people to find a job, leading to an increase in unemployment.
The unemployment rise has a social cost for the government, the distribution of employment benefit will increase, offsetting the rise in consumption tax. The government decision will have a positive impact on low earners income but is too much focused on the short term impact of the measure without enough consideration to the negative long term impacts.p.p1 {margin: 0.0px 0.0px 0.0px 0.0px; font: 16.0px ‘Helvetica Neue’; color: #000000; -webkit-text-stroke: #000000; min-height: 19.0px}p.p2 {margin: 0.0px 0.0px 2.0px 0.0px; font: 11.0px Times; color: #000000; -webkit-text-stroke: #000000}p.p3 {margin: 0.0px 0.0px 2.0px 0.0px; font: 11.0px Times; color: #000000; -webkit-text-stroke: #000000; min-height: 13.0px}p.p4 {margin: 0.0px 0.0px 0.0px 0.0px; font: 11.0px Times; color: #000000; -webkit-text-stroke: #000000}p.p5 {margin: 0.0px 0.0px 0.0px 0.0px; font: 11.0px Times; color: #000000; -webkit-text-stroke: #000000; min-height: 13.0px}span.s1 {font-kerning: none}
