The minimum wage is the lowest salary or remuneration that should be paid by the employers to their employees. It is a standard set by the law of each country. Most countries in the world have introduced the law of minimum wage by the end of the 20th century to avoid labor exploitation.
The origin of the minimum wage law is traced to the Ordinance of Labourers (1349) which is considered as the start in the labor law in England. It is considered as a law declared by King Edward III who also set a maximum wage level for the laborers in medieval England. As a wealthy landlord, King Edward III had to face shortages of labor due to the spread of the Black Plague in 1348. This encouraged him to make a standard wager amount for the laborers compared to the price of food.
From those days, the minimum wage has been evolved as a legal condition and included in the laws assuring a specific minimum remuneration for the employees in every business industry. Minimum wage rates vary majorly across various countries in the world based on the labor availability and the economic conditions of the country. Overall, the introduction of minimum wages helps to reduce the exploitation of employees in sweatshops which provide poor working conditions and less pay but have a high amount of difficult tasks to do.
Implementation of minimum wage levels has helped many low-income families overtime to gain financial stability and to use their skills in satisfactory working conditions and to get paid for the efforts they are putting into work. It also has stopped the unfair bargaining power of the employers which tends to put the employees in a situation where they had to engage in risky and more energy consuming jobs for a very low salary.
Even though there many benefits available in the implementation of minimum wage levels, also has been identified a number of drawbacks of the implementation of the minimum wage. The benefits are considered as a solution to minimize poverty, increase the living standards of the employees, reduce inequality, and help to reduce the income distribution differences in the economies.
In contrast, it is also identified that setting minimum wage levels increases poverty by reducing the number of job opportunities available for the employees, mostly to non-skilled laborers. According to the demand and supply model of the labor market, it is identified that the increasing minimum wage can create employment losses and eventually lead to increases in the unemployment level in economies. If the minimum wage rate is high, employers will demand a lower amount of time from employees as it is expensive to have more employment hours.
If the labor market is in a state of monopsony, where only one employer in the labor market is hiring, it gives the employer the power of influencing the wage levels due to the low demand and higher level of supply. In a situation like this, the minimum wage can increase the efficiency in the particular market as the employees who are engaging in work activities would increase the production efficiencies to save their jobs.
In addition, it is also argued that the minimum wage laws are encouraging employers to replace human capital with machines, computers, and technological processes. This will create an adverse impact on the employees and mostly unskilled workers. This tendency creates a long term cost-benefit for the employers and an increase in the unemployment level in the economy. Process automation, self-checkout machines, and robotic technologies are examples of these types of scenarios.
It is identified that setting a minimum wage has its own benefits and drawbacks. However, it is important to consider it as a method of generating a fair income distribution in the economy.