The Minimum Wages (MW) were practically executed at the start of the 19th century. According to the IMF working paper, currently, 90% of all countries and their governments have legalized the laws for MW within their economies. However, the fundamentals to define their roles in all countries varies i.e. in most of the Developed Countries (DCs) the MW is set on an hourly basis and in ‘under’ or ‘Less Developed Countries (LDCs)’ it is set on a monthly basis for all workers.
The minimum wage is the lowest possible wage for an employee per hour or month mandated by the federal authorities. They are mandated to raise the income level of unskilled employees. Both developing and developed economies enforce to execute the mandated national minimum wage laws. MW can vary state-to-state or region-to-region depending on the stability of the formal economy and grand domestic productivity. Like, currently, the minimum wage set by the federal bodies of United States is $7.25 per hour. Whereas, it varies from state to state ranging from $6 to $14 per hour.
High minimum wage and its impact on an economy
If any state or country mandates a high minimum wage, it would eventually influence the average labour cost, employment, and as well as inflation. According to the practitioners setting the higher minimum wage would increase the average wage bill that is supposed to be paid by the employers which increases the prices of goods or services they offer, and that leads to inflation in an economy.
Moreover, increasing the too-high minimum wage would also require employers to lay off employees to maintain operational costs and the workload shifts to others. As a result, unemployment increases and a significant shift can be observed in employment from a formal economy to an informal economy. This behaviour can highly influence the developing economies is related to the developed economies. Because the gap between formal and informal economies varies in both developed and developing economies around the globe.
Less developed countries (LDCs)
Minimum wage laws are important in the less developed (LDCs) or developing countries to combat poverty. These laws also provide the ability to purchase goods and services and it’s particularly for unskilled employees. Whereas, A considerable controversy remains in the developed economies in terms of their fulfilment of the objectives related to their GDP. As the behaviour is significantly supported by the ‘Segmented Labour Market Model (SLMM)’ which states that a higher minimum wage has an inverse relationship with employment and productivity in the formal economic setup.
This suggests that workers who can lose their jobs because of the minimum wage laws will find jobs in the informal economic setup where minimum wage laws cannot be enforced or executed. Thus, the real wage graph will show depressing behaviour, unemployment will increase and the output of the formal economies will highly be affected.
