The minimum wage law is an important policy that governments use to ensure that all employees are paid at an amount equal to their productive rate. In the US, the federal government first established the minimum wage rate by establishing the Fair Labor Standards Act in 1938 (Rocheteau and Tasci 1). Overly, the minimum wage law affects all types of business such as the monopolistic, competitive, and oligopolistic market. In fact, the effect of the minimum wage rate is due to the competition for labor. Basically, in a competitive market, there are many employers looking for employees. On the contrary, a monopoly and oligopoly have few employers looking for employees. This paper will give an opinion on the effects of minimum wage policies on monopolistic, perfectly competitive and oligopolistic markets.
In a monopolistic market, a minimum wage rate leads to the salary levels to reach their competitive price. Normally, a monopoly finds itself with the exclusive ability to hire workers. Therefore, it becomes a monopsony, which is a single buyer of a product or service. Since a monopsony does not have any significant competitors, the business pays its employees below their productive levels in order to maximize profits. However, in case the company wants to hire additional employees, it must fix its wage rate at a level that is higher than its current salary level. Consequently, if a minimum wage rate is set at a level that is above the monopsony price but below the competitive rate, the marginal cost of labor increases to a point that it equals the labor supply. As a result, the cost of a new worker is, in fact, the employees’ productive levels.
The setting of minimum wage rates in a perfectly competitive market destabilizes it. Actually, if these salary levels are set above the market rates, all business close down since hiring employees at this price will lead to losses. On the contrary, if the salaries are set below the market price, businesses demand more employees. In turn, this leads to a shortage of workers and their salaries increase to their original levels. Ideally, the reason for this behavior is due to the competitive nature of companies. In this case, if a firm deviates from the industry’s wage rate, it will either pay less and lose its workers or pay more and make losses. Therefore, the market wage rate is always the employees’ productive level.
Effectively, the setting of the minimum wage rate in an oligopolistic market leads to the industry paying its employees at their productive levels. Ideally, this market has few big companies that work as cartels. Moreover, these partnerships are always mutually beneficial. In effect, these businesses jointly increase or decrease the industry’s wage rate. In order for the enterprises to maximize profits, they usually set the wage rate at a price that is below the industry’s competitive salary but above the employees’ reservation rate. In light of this, if a minimum wage rate is set at a point above the oligopolies’ price, the marginal cost of labor increases to a level equivalent to its marginal supply. In fact, the new price is the minimum wage rate. Overly, the minimum wage rate becomes the industry’s wage rate.
URL for the document used in this paper.
Rocheteau, Guillaume and Murat Tasci. The Minimum Wage and the Labor Market. Cleveland, OH: The Research Department of the Federal Reserve Bank of Cleveland, 2007. Web.