Min. Wage

A Microeconomic Analysis of

The Minimum Wage Law

Hong Kong government suggested that minimum wage rate have various kinds of advantages such as protecting the welfare of low-income labors and narrowing the rich-poor disparity. This paper aims to point out the side effect of the law.

First, in free market, price act as a criterion of allocating resources and as a price singal knowing the market value of the products and services. However, minimum wage law will weaken the price functions and affect the free market system. Since price cannot function well due to the minimum wage rate, it increases the information cost, which cannot fulfill wealth-maximization minimizing the cost and maximizing the benefit.

Second, minimum wage law increases the production cost and the cost of investment. Because of high production cost, owners may cut cost such as laid off the employers in order to maintain the competitive, even may shut down the company, which will increase the unemployment rate. Furthermore, foreign traders have lower incentive to invest in Hong Kong and increase the unemployment rate.

According to the law of demand, when the price increased, the quantity of demands will decrease, vice versa. As we can see in figure1, let W be the wage, Q be the quantity demanded, S be the supply of worker and D be the demand of worker. When the wage law carries out, low-wage workers’ salaries W1 (around $20 per hour today) will increase to W2 (legislated wage $28). Minimum wage rate is an effective price floor. it cause surplus ,which means increasing unemployment rate.

Increased in unemployment rate would causes social problems. Opportunity cost is the highest-valued option forgone. Compared to having a stable job, the cost of being a thief is the job. Now, the opportunities of unemployed people being offenders decreased since they lose their jobs.

Pareto condition is a statement which marginal cost equal marginal benefit. It hints that the values of...