Minimum Wage

What impact do Trade Unions have on Wage Rates; 

  1. Minimum wage 

Trade Unions aim to safeguard the jobs of their members. They may set minimum wage for a particular occupation, below which no labour will be supplied. 

  1. Restriction on the Supply of Labour 

A union may attempt to restrict the supply of labour to an occupation in an effort to keep wages high. Methods used to restrict supply of labour include 

  • Lengthy and costly training periods 
  • Restricted opening for trainees 
  • Difficult exams 
  1. Trade unions unwilling to accept wage reduction 

Wages generally increase especially if there is an economic boom and the demand for labour is high. However, during a recession when demand for labour falls, union may be unwilling to accept a cut in wages. 

Setting a minimum wage 

Trade unions negotiate a minimum wage for their workers, this ensures that there is no supply of labour below a certain rate. 

Labour market – a minimum wage

  • The trade union may negotiate a minimum wage rate: this is set at W. min 
  • No workers will be supplied below W. min 

Impact of minimum wage: 

  • Excess supply of labour which can lead to unemployment 
  • Firms substitute labour for capital / machinery.

Wage drift – if the demand for labour is strong the wage rate may rise above the rate negotiated by unions and employers. 

Labour hoarding – this is when firms employ labour even though it is unprofitable to do so 

Exam Q: 

Reducing Minimum Wage

Advantages of reducing minimum wage Disadvantages of reducing minimum wage
Lower labour costs Resulting in continued production and reduced risk of business closure.Reduced standard of living Workers will now receive lower income and so their standard of living will fall
Lower selling prices With production costs falling this may lead to lower consumer prices and increased competitionWorkers on lower incomes suffer most If the reduction is confined to those on the minimum wage rate then the burden is not being shared equally within the workforce, which is not equitable
Increased demand / protection of jobs The lower wage rate leading to lower prices may lead to increased demand and hence greater demand for workers. Indigenous jobs are protected e.g. jobs in the tourism sectorDiscourage employment The reduction may not encourage people to join the workforce/ it may lead to a greater participation in the black economy
Investment stimulus Reduced costs may lead to increased investment by entrepreneurs / increased foreign direct investment.Reduced aggregate demand /spending Lower incomes will reduce spending and so the demand for goods and services may fall resulting in unemployment/less VAT receipts.
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