Strengths And Weaknesses Of Minimum Wage Economics Essay


Minimal pay is non something new whereby it has already been used in others state many old ages ago. The first minimal pay was instituted by the Fair Labor Standard Act of 1938 and legally-mandated lower limit rewards have existed in the United States for over 60 old ages. Even our nearby state such as Indonesia besides pattern minimal pay in their state. The consequence of lower limit pay is depending on the construction of labour market. For illustration, in a absolutely competitory labour market, an addition in the lower limit pay will diminish the overall degree of employment ( Abdulahad & A ; Guirguis, 2003 ) .

Harmonizing to Y.B. Datuk S. Subramaniam 2010, Ministry of Human Resources Malaysia, our rewards did non increase much over the old ages. Base on the information from the World Bank study, for the last 10-15 old ages our pay merely increase 2.6 % . Harmonizing to our National Employment Return 2009, 34 % of 1.3 million employers earn less than RM700 which means their earning in below the poorness line income degree that determined by our authorities at RM720. These lower income groups largely come from urban countries and work as labour. They are ever confronting trouble in run intoing their basic demand due to the addition in rising prices and cost of life but rewards did non increase.

Normally people will believe that low-wage workers will be benefit from the pattern of lower limit pay because it will increase their entire pay income ( Danziger, 2009 ) . However, minimal pay will besides do some negative effects to different position of economic.

Strengths of Minimum Wage

Increase the criterion of life for the poorest

In the Neumark and Wascher survey, they conclude that the addition in minimal pay would likely assist hapless household flight from the poorness. As reference above, our rewards did non increase for the past 10 old ages but the rising prices still go on and do higher criterion of life. In Malaysia, there is about 34 % of employeesaa‚¬a„? pay is below the poorness line. If the lower limit pay is applied, this can guarantee that they will at least acquire adequate money for their basic life demand.

Prevent loss of labour force

Recently we are sing loss of Malayan to other state such as Singapore and Australia. This is because their state pay construction is higher than us. Our authorities had spent a batch of money to develop our people but after the preparation they tend to travel oversea to work alternatively of remaining in Malaysia. We are now losing skilled Malayan to the other state for no other ground but because of pay.

Motivates and promote employees to work harder

Harmonizing to the efficiency pay theoretical account, employees with better paid will be more productive. That means if a house willing to pay their workers with a pay higher than the minimal pay, it will motive them to be more responsible in their undertaking. Akerlof ( 1982 ) , explain this motive as a gift exchange motivation, such as a a purchaser willing to pay more than the minimal monetary value to purchase certain service due to the consequence of the footings of exchange on the norms.

Encourage people to work alternatively of affecting in offense

Cost of life is increasing, transit cost higher than earlier, nutrient become more expensive, but workers salary did non increase and now is non adequate to cover their day-to-day disbursals. In order to acquire adequate money to prolong life they will believe of other ways including involve in illegal activities such as selling drug or kidnap people. However, if minimal pay is applied, so people will at least acquire adequate of money to prolong life. No 1 will be willing to take the hazard to be involved in offense unless it becomes necessary.

Failings of lower limit pay

Increase the unemployment rate

Diagram ( a ) : rewards vs employment rate

In the diagram it shows the relationship between rewards and employment rate. In absolutely competitory labour market, the addition in minimal pay will increase the unemployment rate. The more elastic of the labour supply and demand are, the greater the unemployment effects of the higher minimal pay ( Abdulahad et Al, 2003 ) .

Increase the investing of house

Due to the addition of the pay, the production cost of a house will besides increase and necessitate more investing. If a house chooses to keep the production cost, so they will cut down and replace the figure of workers by upgrading the engineerings and indirectly will besides take to unemployment. Besides that, when the investing is high it might besides halt the aliens to put their money into our market.

Discourage for farther survey

If everyone is able to gain money that is adequate to prolong basic demand, so people will be given to keep their current occupation and do non desire to travel for farther survey. This can besides use to the poorer because they need the money to carry through their basic demand and at the terminal they would non hold adequate clip and money to travel for farther survey.

Greater consequence on SMEs

Most of the company in Malaysia is see as little and average endeavor ( SMEs ) such as java store or mini-market. If the national lower limit pay is being imposed and causes the labour cost to be addition, it will ensue many of these endeavors to close down. At the terminal it will do a batch of troubles for the nearby occupant.


From the treatment above, it shows that there are both positive and negative result for the pattern of minimal pay. The authorities has to make up one’s mind sagely one time for all whether is it deserving to implement the national lower limit pay.