View: The Minimum Wage is Bad

This article was contributed by a reader (MSc Economics)

In the online sphere, you can read many articles showing empirical evidence that shows the minimum wage is not a bad idea. Recently, I read an article that basically argued that evidence shows that despite what economists have been saying, raising the minimum wage did not cause unemployment, or that unemployment increased incrementally or minimally. And basically econometric analysis does not have conclusive results one way or the other. 

This economics paper attempts to explain to economics students why such views are wrong, and that the minimum wage is not a good idea. In fact, most - but of course not all - distortions of the free market are not good. To steal some beautiful lines from J. M. Keynes, we "have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand." I stole these lines because I like them. 

Before I begin, and to rebut an article that said most ECONS101 teachings on the minimum wage are wrong, the economic theory that we promulgate is as such:

A minimum wage is a minimum legislated or mandated wage. 

If it it set above the market clearing level, then it will be effective - and if it is set too low, then it will not be effective as the market clearing equilibrium wage will be higher than the legislated or mandated wage. 

In economic theory, assuming a perfectly competitive market, when the minimum wage is effective, the quantity demanded of labour should decrease, while the quantity supplied should increase. Assuming that this happens, then there is an increase in unemployment, ceteris paribus (the famous all other factors remaining constant). And the higher the minimum wage, the higher the unemployment should be. 

However...

Fact: Not all countries experienced a fall in employment after implementing minimum wages. 

Does this actually mean that there is something wrong with the economic theory? No - it means that either the wage is set too low, or other factors weren't held constant. And indeed that was the case. When I was reading my undergrad in the UK for a stretch the minimum wage was 7 pounds an hour. Assuming one worked 10 hours a day, that was 70 pounds. And for a month that would have been 70 x 20 working days, which would be 1400 pounds. Now, given that my UK-based classmates earned 50,000 pounds per year, and some even earned much, much more... You can come to the conclusion that maybe the real market clearing wage rate was much higher. Not a real criticism. In other cases, when you examine the evidence, it turns out that minimum wages don't mean much when the economy is undergoing a boom. When real wages are rising, minimum wages don't mean that much. 

But for those countries which did not have a boom or where minimum wages were really high, youth unemployment rose - because the people this policy was supposed to help were precisely the ones hurt by it. You can check out the facts for your own consideration - but it is true that some studies show that unemployment rose among the groups with the minimum wage. In some countries, youth unemployment is much higher than other types of unemployment measures. Nothing is wrong with the theory, but it just needs to be refined. 

Now, as for the economic arguments that some labour markets are monopsonistic or monopolistic-competitive or oligopolistic etc, that is an argument for another time - and I promise you that eventually I will come back to discuss that. 

To be clear, there are other reasons - non-economic reasons - why there could be minimum wages. I don't believe such normative economic analysis, but they are there. This economic paper is not one of them. Just do not diss simple economic models because of a wrong understanding of how they operate and explain - or do not explain - the economic world. 

JC Economics Essays - Special thanks to our readers for their kind contributions. Just like the previous opinion piece, this economics perspectives essay is also contributed by SS.  

At JC Economics Essays, we focus on strong economic writing skills, clear and direct explanations of core economic concepts, and the use of relevant, real-world examples to strengthen arguments. And we also strengthen students’ understanding of economics as a subject. We also focus on critical thinking and evaluating economic arguments. Thank you for supporting us, and cheers! 

Discuss whether a reduction in unemployment improves the standard of living of a country. [13]

Material standard of living (SOL) refers to the amount of goods and services one can enjoy in their narrow measurable material form. In its non-material form, non material SOL includes leisure, having enough rest, healthcare benefits and personal welfare. 

Most of the time, real Gross National Product (GNP) is the closest form of measurement of material SOL. Real GNP is the total output produced regardless of geographical boundaries, so long as it is owned by a citizen of the country, over a period of one year, after taking into account the inflation rate of the country. This is because real GNP takes into account not only the inflation rate, but also population growth and only includes factors of production by citizens only. 

A reduction in unemployment will increase total national income (NY) since more people are currently working. This increase in NY can be an increase in GNP as well since more workers may produce more products. Also, the increase in NY can result in higher consumption, pushing up aggregate demand (AD = C + I + G + X - M) as people see that the economy is doing well and consume more. Furthermore, the newly-employed will now have an income to spend. These will improve their material standard of living as they satisfy more of their material needs or wants.

Also, as one becomes employed, they will be relieved of the emotional stress and psychological burden of being jobless or unable to provide for their family. This way, a reduction in unemployment will improve the emotional well-being of the newly-employed, leading to improvement in non-material standard of living. 

Furthermore, a reduction in unemployment rate can bring down the crime rates as well. Given that more people are employed, there will be less people going against the law such as robbing others as a result of desperation. This will also improve the non-material aspect of standard of living. 

However, it is not always true that a reduction in unemployment will lead to a better standard of living.

If more people are employed to work for long hours, there will be a fall in their welfare as they may be overworked and have a higher tendency to fall sick due to the lack of rest. The workers’ health is at stake and they might have to pay for their own medical bills, resulting in a fall in both the material and non-material aspect of standard of living.

Also, a reduction in unemployment rate may actually mean that both the parents are working instead of one. This might be bad for the children as they might be left at home on their own. The lack of communication and bonding time within the family might cause the children to feel neglected and the family ties may not be as strong. Parents might not understand the needs or wants of their children well and this may lead to misunderstandings and disputes. Therefore, this reduction of unemployment may lead to a fall in non-material standard of living.

Moreover, more people working together in a small area might result in poor working conditions. If more people are working under a worse off condition then they are unhappy during their time working. This will also lead to a fall in the non-material standard of living.

Furthermore, an increase in employment rate might not necessarily means an increase in the amount of goods and services produce due to the law of diminishing marginal returns. It states that the last person added to the production may produce lesser than the previous and there will be a point where increasing the quantity of labour will not help to increase production. Given that the increase in income led to an increase in AD, it might cause demand-pull inflation as there is too much money chasing too few goods. Therefore, there might not be an increase in the material standard of living as well. 

Additionally, if the reduction of unemployment rate leads to higher level of production that causes higher levels of pollution or higher rates of environment degradation, then the non-material standard of living did not improve since we are exposed to more pollution that may affect our health. 

All in all, a reduction in unemployment is a good thing and it is also one of the macro-economic aims of the government. However, firms should take care of the welfare of their workers and ensure that the higher level of production does not cause any harm to the environment or people. The workers should have a work-life balance, leaving enough time for leisure and family as well. 

JC ECONOMICS ESSAYS: Economics tutor's comments - Note: This economics essay was written by an Economics student who has already graduated from Junior College, who attained a grade A at H2 Economics at the A levels, but it is the student's own opinions and analytical, essay writing methods, and should be read with an critical, analytical, observant eye. This economics essay is slightly different from the others in that this was a reflective attempted piece by a former student who is now an undergraduate, whereas the other essays on this site were written by economics tutors or students studying Economics at the point in time their respective essays were written. Some light essay editing was undertaken by me, the editor, because this essay was written free style. However, the main thrust of the essay and its original flavour are the same. This essay shows that there are a variety of equally valid approaches of tackling Economics essay questions, and that essay skills and techniques are very important and transferable skills, that last the test of time. However, critical thinking and reflection still applies - what is good about the essay's introduction, body, and conclusion? What can I learn from this essay, written by a former student who achieved a grade A? What can I do better, or how can I reach this standard or exceed it? Thanks for reading, and cheers. 

“Economic indicators such as real GDP per capita are the best way of measuring standards of living in a country”. Discuss. [25]

Introduction, Definitions, and Approach to Essay

This Economics essay discusses if economic indicators are the best way of measuring standards of living in a country. One such economic indicator is Gross Domestic Product. What is Gross Domestic Product (GDP)? Nominal GDP is defined as the nominal money value of all final goods and services produced by factors of production located domestically within a country, over a given time period, usually a year. 

Nominal GDP is often converted to real GDP, which measures the level of real output in an economy. Real output refers to the actual physical amount of goods and services produced, whereas in contrast nominal output refers to merely the money value of the goods and services produced. 

Per capita refers to the fact that real GDP has to be divided amongst the population of the country, so that it represents the output per person in a country. 

Why is this important? If a country’s national income has increased together with its population, we need to determine the national income per person, GDP per capita, the total output per person, in order to determine whether average output levels have actually risen. This is important because if Country A has both higher real national income and a larger population compared to Country B, the real GDP per capita for both countries is required for a fair and justifiable comparison of material living standards to be made. 

What are material living standards? Material living standards can be measured by economic indicators such as GDP and GNP (Gross National Product), where a country’s income level represents the ability of its residents to consume goods and services. The higher the national income, the greater the potential level of consumption, hence, the higher the material living standards.

Calculation and Interpretation Problems

However, there are problems in calculation and interpretation when using real GDP per capita to measure the standards of living in a country. 

First, the calculation problems in this respect include data collection problems, underground activities that are not recorded in GDP due to illegality and other reasons, and non-marketed activities which are not recorded in GDP. 

Secondly, interpretation problems include income distribution, composition of output, leisure and stress levels, negative externalities, differences in climate and intangibles.

All these will be discussed in this Economics paper. 

Data Collection Problems

First, data collection problems occur when mistakes arise due to the large numbers of firms and households that governments need to collect information from. This problem may be particularly serious in Less Developed Countries (LDCs) because of possible widespread illiteracy. Without the ability to read or write, some residents in LDCs are unable to fill in forms to accurately declare their income. 

This is often compounded by the problems of geography and inaccessible locations. Economic activities in geographically-inaccessible areas are also likely to be omitted because of poor transportation and telecommunications infrastructure, resulting in the standard of living in that particular country being understated, because these activities might raise the standard of living but simply cannot be measured or collected in the form of usable data.

"Underground" and Non-marketed Output

Furthermore, output that is non-marketed is not recorded in national income statistics even though they generate welfare for society. For example, the value of DIY (do-it-yourself) furniture, and DIY renovation, home-cooked meals, mothers' love, and childcare provided by parents or relatives are not recorded, while they contribute to standard of living. 

Also, particularly in developing countries (LDCs) such as some countries in Sub Saharan Africa, where there is often much subsistence farming, where people can grow crops and often rear animals for personal consumption, the size of the non-marketed economy can be quite substantial and the standard of living could be massively understated.

Differences in Climate and Weather

Also, differences in climate across different countries may also cause the standard of living measured by real GDP per capita to be less accurate, because countries in colder climates tend to spend more on clothing, insulation, and heating. Thus, while such expenditure raises real national income, their living standards are actually overstated as compared to other countries with better climates as these other countries spend less on clothing, insulation, and heating. Conversely, countries in the tropics also probably spend more than temperate countries on air conditioning, which will overstate their living standards as compared to countries in more temperate regions.

Stress and Other Intangibles

As an economy develops, people often end up working longer hours or more intensively. Many jobs also change from being routine to being more complex. With less leisure and greater stress, the rise in standard of living tends to be overstated by rises in national income. When comparing between countries, the standard of living would possibly be overstated for the country with relatively longer working hours, with poorer work-life balance, and possibly a more stressful work environment.

However, let's go one step further. Although calculation errors could be minimised as countries develop, currently there are few feasible solutions. Underground and non-marketed activities could be estimated by the values of such activities but those estimates are subjective and inaccurate. Hence GDP per capita still has its problems and limitations in measuring the standards of living in a country. GDP per capita could only measure the material standard of living and is unable to measure the non-quantifiable aspects of the country standards of living.

Alternative Ways of Measuring Standard of Living

On the other hand, economic indicators that measure material standard of living are not the only means of measuring standard of living. There are also other alternative ways to measure the standard of living in a country. 

Various Other Development Indicators

Examples include specific development indicators such as healthcare indicators, like life expectancy and infant mortality rates, while examples of education indicators include literacy rates and proportion of the population having primary, secondary, and tertiary education levels. Consumption indicators like the number of TV sets, refrigerators and telephone lines per capita are also commonly used. 

HDI and MEW

Two famous alternative indicators are discussed here - HDI and MEW. 

The Human Development Index (HDI) concept, originally suggested by research from the famous economist Amartya Sen, comprises data on PPP-adjusted GDP per capita, school enrolment, adult literacy, and life expectancy. The central economic idea here is that human development depends on the quantity of resources available to the people in the country, their ability to use the goods and services and the time they have to use these goods and services and the time they have to use these goods and services. 

Measure of Economic Welfare (MEW) comprises data on national income, with allowances made for leisure, non-marketed output, and services contributed by existing consumer durables. Offsetting deductions are made for “regrettables”, such as expenditure on commuting to work, national defence, law enforcement, negative externalities, and initial expenditure on consumer durables. 

While both approaches, HDI and MEW, are quite comprehensive in their attempt to capture a wide range of economic and non-economic factors affecting society's living standards, including the non- quantifiable aspects, estimating monetary values of some areas can be rather subjective and spurious, although this is a salutary corrective already.

Conclusions

In conclusion, while by using GDP per capita to measure the standard of living may have its limits, however, by using a uniformly accepted economic indicator of standard of living is arguably better than using economic indicators with differing opinions, standpoints, philosophies, and perspectives to compare across different countries. In fact, standards of living itself is hard to be defined, and thus GDP per capita with its uniformly accepted system may only be used to generalise the standard of living of different countries. 

JC Economics Essays: Tutor's Comments - This H2 economics essay on development and standard of living was adapted, edited, and changed from some essay contributions on my companion website. It is very well written, and has many good aspects to learn from. However, do please note that this was not written under "A" level timed examination conditions, which tend to be stressful, as A levels are time-based, difficult examinations with pressure.  Also, special thanks to MA for her suggestions on highlighting and bolding words that are important for the essay; unfortunately, this Economics blog is for Economics Essays and it's much too difficult to include a glossary. Thanks for reading and cheers!

Discuss the difficulties of comparing living standards between countries. [25]

Discuss the difficulties of comparing living standards between countries. [25]

Introduction

This paper discusses the difficulties of comparing living standards between countries. On the one hand, it does not seem difficult to compare living standards between countries because of the presence of economic indicators such as real GDP per capita. On the other hand, the issue is far more complicated than that because there are many other factors other that material economic welfare that come into play, and there are alternative indicators that give a different view of living standards across countries. The fundamental issue in the final analysis is that living standards are not easy to define, conceptualise, and consider.

Not difficult to compare living standards between countries

First and foremost, it is relatively easy to compare material SOL (or economic welfare) between countries, provided that economists have access to these indicators and that they are reliable. The most famous economic indicator is real GDP per capita.

First, Gross Domestic Product (GDP) is the measure of final goods and services produced within a country, in a given period of time, usually a year. Secondly, Real GDP means that the focus here is on actual goods and services produced, and the increases from year to year are not from nominal increases, or monetary/ money increases solely. Third, per capita is merely the fact that the real GDP has to be divided amongst the population of the country. Usually, there is one final calculation done before comparison between countries, and that is to standardise the currency (usually the US dollar) on which the comparison is made. Clearly, in terms of economic welfare, a country with a higher real GDP per capita means that its citizens are more likely to have a higher economic standard of living compared to another country with a lower real GDP per capita. This is because, on a per person basis, each citizen has access to real goods and services worth more than another country with a lower real GDP per capita. Hence, comparison between countries can be made with an eye to finding out differences in standards of living.

Difficult to compare living standards between countries

However, it is actually more difficult to compare living standards between countries than merely using real GDP per capita. First, sometimes the indicators might be inaccurate. For instance, Chinese GDP figures during the 1960s and 1970s were often fabricated and false, and when they were true they often suffered from measurement errors.

Second, when comparing between countries, there is a need to standardise the currency base for comparison, usually the US dollar. This leads to an interesting problem because the exchange rates differ from country to country, and as such sometimes a currency that is valued lower than the US dollar would lead to the country appearing “poorer” or with a lower “standard of living” than the US because when the national income figures are converted to US dollars, they look lower than they otherwise would have looked.

Third, there is also no mention of income or wealth distribution, which is a problem. A country with relatively high real GDP per capita might have an uneven income and wealth distribution, but a country with a lower real GDP per capita could have an equitable income and wealth distribution, and thus its citizens are actually much better off than the other country ranked higher on the real GDP per capita scale.

Fourth, in poorer countries or developed countries inflation is usually lower and the same dollar can buy more goods and services than developed countries, and as such poorer countries are not compared fairly to the richer ones, because they usually appear “poorer” although the same US dollar can buy more in the poorer country than the rich one.

Furthermore, the quality of life is dependent on other factors not captured by national income statistics. The definition of standard of living is under examination here. In other words, non-quantifiable aspects of life are not captured by national income statistics. We should consider information from the social, political, cultural, and environmental aspects of a country rather than purely economic indicators. For instance, countries high on national income estimates may fare poorly on social indicators, because countries involved in wars or fighting could have a higher production level but their people are suffering, or countries with high pollution that needs a lot of cleaning up could have a higher GDP but their people are also suffering from negative externalities. Hence, this is a limitation of using real GDP per capita as a measure of comparison.

Alternative indicators

There are also alternative indicators that could be used as well. One major example would be Human Development Index (HDI). Closely associated with economist Amartya Sen, the HDI is a measure of life expectancy, literacy, and education, among other social and political aspects, comprising the standards of living of a country. It is used to distinguish whether the country is a developed or developing country, and to measure the impact of economic policies on the quality of life in the country. However, alternative measures such as the HDI have not found as much favour or success as national income accounting statistics, as they are still difficult to quantify and are normative rather than positive. Normative means that these indicators have subjectivity and are ideal, subjective, and norm-based, rather than a factual, positive, real comparison.

Conclusions

In conclusion, while it does not seem difficult for economists to compare economic living standards between countries because of the presence of economic indicators such as real GDP per capita, the issue is more complicated than that because there are many other factors other that material economic welfare that come into play, and there are alternative indicators that give a different view of living standards across countries. The fundamental issue in the final analysis is that living standards (and the concomitant quality of life in a country) are not easy to define, conceptualise, and consider, and hence opinions and arguments will continue to differ on this subject.

JC Economics Essays – Tutor's Commentary: This Economics paper is OK, generally well-written, but it is not excellent, outstanding, or incredibly good. As an examination essay, it might fetch a borderline A for the "A" levels, and if it were benchmarked against much better Economics essays, might get a B rather than an A. Well, why is this the case - a borderline A grade Economics essay? Put yourself into your Economics tutor’s (or lecturer’s, or teacher’s shoes, for that matter). Think about how your Economics tutors in school would judge this essay. One hint is that the conclusion, while true, might not make a good evaluation. Economics tutors often lament that their students cannot write good evaluations. Think of how you would make the conclusion better. (Think also of how you could make the essay as a whole better. Maybe the distinction between material and non-material standard of living could be made more explicit and better explained, etc?) Well, the good news is that you might become the special Economics student who can prove to your Economics tutor that you can write an excellent evaluative conclusion for any Economics tests or examinations... this is because you have time to think about it, and figure out what is wrong now.