Disposable Income of Workers on Low Pay 1

DISPOSABLE INCOME OF WORKERS ON LOW PAY

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 Disposable Income of Workers on Low Pay 2

Assess the case for and against the government intervening to raise the disposable income

of workers on low pay.

Disposable income

Disposable income refers to the total amount of money that a worker receives for

spending and saving (Anon, 2017). Disposable income is arrived at by deducting the income

taxes and PAYE form gross income. For instance, if an individual earns $ 200, 000 per month

with an effective tax rate of 20%, its disposable income would be $200, 000-$40,000= $160,

000. This is implies that it is possible to estimate the rates at which the family spends and saves.

Economics argue that disposable income data of all the working citizens can be used to measure

the economic status of a country. The statistical data are also worthwhile in gauging the

individuals’ rate of saving and spending. According to Anon (2017), the government can use the

disposable income data to decide on whether to raise the minimum wage or not.

Raising minimum wage of low-income earners and methods of government intervention

In the recent decades, the challenge of wage growth for the enormous majority of

workers in all nations across the globe. As Berlatsky (2012) explains, the wage inaction is not

certain and it is there a public law to address the issue of raising the minimum wage. Minimum

wage is an essentially legislative or legitimate minimum money of money that the employers can

afford to pay per hour. For instance, in United Kingdom, the current the minimum wage is 7.50

pounds per hour for workers who are over 25 years. Economists recommend that economic

theories should be applied to alleviate the policy of raising wage bill. Economic theory is a

standard code that affects the flow of disposable income of individuals from the minimum wage.

The theory assists the economics in understanding the effects of wage policies in regulating and
 Disposable Income of Workers on Low Pay 3

monitoring the economy of a nation (Kukathas, 2010). Likewise, these policies may be set up to

standardize the minimum life of citizens. They also allow the government to maintain the

essential quality life amongst its citizen. In general, minimum wage policies are intended to

sustain the wage impartiality and objectivity of the country (Anon, 2017). However, the

minimum wage policies could result in adverse effects on the overall economy of the nation. As

some economics believe, raising the minimum wage could pose a challenge to employers,

especially small firms, and thus resulting in slower and increased unemployment.

In the process of raising minimum wage, the government may go through various

challenges that are also felt by the wide-ranging economy. To start with, for the higher paid

workers, minimum wage laws could be a problem because the laws ensure that the low-income

earners are sufficiently paid for their services. The laws also guarantee both permanent and

skilled employees are not entitled to receive benefits. After a long service, they do not get wage

increment for a more extended period irrespective of the firms for which they work. Nonetheless,

the companies end up raising the wages and thereby increasing the cost of running the business.

Moreover, the minimum wage policies have momentous consequences on the inclusive economy

of the country, especially on the income tax commitment (Bauducco & Janiak, 2017, pp.57-76).

For instance, states that raise revenue through progressive income tax methods force the

taxpayers to more taxes from their incomes increase. Putting in place minimum wage laws

implies that higher tax bracket will have more individuals. On the other hand, companies will

also be laying off some employees or slower hiring because substantial labor expenses will

overpower them (Anon, 2017). As shown in figure 1 suggests that when the labor market is

ideally assumed competitive, the national minimum wage (NMW) is raised above the
 Disposable Income of Workers on Low Pay 4

equilibrium wage. Accordingly, real wage unemployment is created due to decline in demand for

workers (Q1 to Q2) and excess supply of workers (Q3 to Q1) (Berlatsky, 2012).

‘Figure 1, showing an increase in minimum wage (Berlatsky, 2012).’

The government can also get involved in raising the minimum wages of low-income

earners by a way of reducing relative poverty levels. One primary reason for raising the

minimum wages is to intervene the issue of poverty in the economy. Presence of poverty in the

society reflects the fact that there are high number of people who earn lower than the average

wage (Bacache-Beauvallet, & Lehmann, 2007, pp.63-81). Poverty could be because of not

meeting the statutory minimum wage rates inequality as explained by classical economic theory

Economicshelp.org, 2017). The government can use classical economic theory to determine

minimum wages by use of marginal revenue product (MRP). As show in figure 2 below, the high

skilled labor may be able to secure top wage jobs at (W2). This could have resulted from high
 Disposable Income of Workers on Low Pay 5

levels of inelastic supply and marginal revenue product (MRP). A monopsony employer may

choose to pay (W2) less than the MRP (W1) (Economicshelp.org, 2017).

‘Figure 2, Showing marginal revenue product (MPR) in perfect free market (Economicshelp.org,

2017).’

The marginal revenue product (MRP) of a given worker can be used to decide the wages

the worker should receive (Brown & Jewell, 2006, pp.96-101). According to this theory if the

productivity of a worker is high, then he or she should receive higher wages. Holding other

factors constant, marginal revenue product of classical theory suggests that the senior productive

worker should command high wages. For instance, in hospitals, the highly skilled doctors, they

have a higher marginal revenue (MRP) product because they can meaningfully affect the revenue

of the health institutions. Therefore, the MRP of a highly experienced doctor is high because he

or she can generate enormous revenues for the hospital he or she is working for in terms of the

number of patients visiting the hospital. However, the cleaners have shallow marginal revenue

product because firms or institutions that have employed them do not generate income from their
 Disposable Income of Workers on Low Pay 6

cleaning jobs. To some extent, the theory assumes that wages paid to workers could be

determined by the factors affecting demand and supply and thus workers should pay revenue

equal to the MRP again. Policy makers to set wages considering the MRP of a worker can use

the theory. In theory, this is supported by the fact that labor markets are in some degree flexible

because it is possible for workers to shift from a low paid job and take a high-paid ones.

Moreover, the workers have perfect information on the companies that pay better salaries.

Wage inequality is another challenge posed by increasing minimum wage

(Economicshelp.org, 2017). It is magnified by relevant skills and qualifications an individual

has. For instance, a highly skilled or qualified and experienced doctor has high chances of

commanding a high wage job. Cohen (1972, pp.41-50) adds that if the number of highly skilled

doctors is limited, then the health intuitions have limited choices. Ultimately, the supply of labor

is said to take inelastic shape because the wages are high. Because of the elasticity of curve, the

doctors have an easy way of bargaining for increasing wages.

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‘Figure 3, an ideal distinction between of aggregate supply of cleaners and doctors

(Economicshelp.org, 2017).’

Contrary, for unqualified and manual labor like cleaners jobs, their supply is high with

low wages. Such jobs require no specialized skills, and therefore, most people are willing to go

for them. In such a scenario, the supply of labor takes the elastic shape as shown in figure 3. It is

therefore evident that in countries where there is a decline in manufacturing sectors, a more

significant number of individuals cannot secure the full-time job (Brown & Jewell, 2006, pp.96-

101). For instance, as shown in figure 3, cleaners are the most affected in labor markets because

they are paid low wages (W1). Conversely, highly skilled and educated workers will be able to

secure full-time jobs.

Navabi (2017) argues that the level of inequality in societies are evidently contributed by

the inadequate and imbalance opportunities. For instance, the middle-class families get high pay,

which means that they can as well manage to pay for better education for their children. On the

other hand, the low-income earners cannot afford to get the better education for their children

(Carlton, & Perloff, 2005).  In addition, raising the minimum wages could help reduce the levels

of social hostility such as crime within the society. This has moral justification because the low-

income workers may not receive benefits, which are costly to the government. By increasing

may help the government generate better and larger incentives because there are many benefits

given to the low paid workers. It is also a motivator to people to move from income support jobs

to unemployed benefits (Majchrowaska & Strawinski, 2017).

The other intervention that the government could take is the efficiency wage

theory/hypothesis that maintains that higher wages result to increase in the productivity and

loyalty of workers to the company. This is important because if the minimum wages are raised,
 Disposable Income of Workers on Low Pay 8

then the all of the higher wage expenses will be recovered through staff retention and

sophisticated labor productivity (Berlatsky, 2012). As shown below in figure 4 offering higher

wages to low-income earners could lead to an improved labour productivity.

‘Figure 4, Illustrating the efficiency wage theory (Berlatsky, 2012).’

The idea of this theory is that if the government raised minimum wages for low-income

earners, workers might be motivated and compled to work more to impress their bosses. This is

because they will be having jobs with significant pay higher than the low wage with benefits

(Boyce, 2014, pp.429-465). For example, in 1914, Henery Ford brought in an idea of paying 5

dollars a day which was above the market rate. This led to considerable queues for Jobs and

noteworthy upsurges in productivity and profits at ford company. However, in practice, the

efficiency wage theory can only work if other firms decide to follow the outfit. If they react by

increasing their wages above the market rates, all firms will not be attracting quality workers.
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Moreover, this kind intervention may fail because if other motivating factors other than the
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wages are not considered the productivity may not be achieved.

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‘Figure 5, an illustration of monopsony theory (Navabi, 2017).’

According to Navabi (2017), the theory of monopsony can be categorized as a major

cause of wage inequality. This is because the theory argues that employers are significant

determinants in labor markets because that have powers in deciding the wages to pay to workers.

One source of monopsony power is the high rate of unemployment, which helps companies gain

more monopsony powers because most people are willing to work for lower wages (Navabi,

2017). Secondly, people seeking employment lack information on the potential employer and job

wage rates. Thirdly, economists argue that most workers are unwilling to leave their jobs to a

higher paying job. Lastly, Majchrowaska & Strawinski (2017) claims that labor market

discrimination has been examined as a source of wage inequality where women have been
 Disposable Income of Workers on Low Pay 12

receiving lower pay because of ostensive difference in skills. In practice, wage discrimination is

forbidden, but it may be carried out in other forms such as only a few workers get promotions to

high wage scales. Nevertheless, in some few decades ago, a monopsony was a single employer

who had no choice but to force the workers to accept his or her terms and wages. Boyce (2014,

pp.429-465) claims that in modern days, the monopsony no longer exist although companies

have their ways of exercising the monopsony power in setting wages. The government can use

monopsony theory to raise minimum wage to a level that it will no cause unemployment.

Conclusion

In summary, I agree with Bauducco, & Janiak (2017, pp.57-76) that if minimum wages

are increased, there will be an increase in consumer spending as well as overall economic

growth. As well, the low-income earners will probably have higher marginal tendency to spend

the extra pay. Possibly, this could also lead to a multiplier effect and thus enhance the economic

growth. Nevertheless, Yamada (2012, pp.41-51) maintains that if the labor markets are assumed

to be competitive, then the minimum wage law will automatically cause unemployment. In my

opinion, rising unemployment will compel the unemployed not to spend less and thus lower the

aggregate demand for products.

I think that raising the minimum wage by the government has a more significant impact

on total demand and aggregate supply of labor as well as the inclusive economy of the country.

My analysis consents to the fact that either way the labor markets are visibly competitive. As in

the case of monopsony, it is clear that 90 % of employers have some degree of monopsony

power whether the minimum wages are raised (Boyce, 2014, pp.429-465). In due course, a

minimum wage set by the government assists to eliminate the effect of employers who exercise

monopsony powers. However, if the minimum wage laws are not in place, the employer will pay
 Disposable Income of Workers on Low Pay 13

the lower wages and exploit workers (Kukathas, 2010). On the side of the government,

increasing wages is achieved through the tested benefits method that has a positive impact on

wage inequality. Blundell et al., (1988, p.58) warns that the proven benefits method will

fundamentally encourage workers to opt for the part-time job. Additionally, workers who work

for long hours will be discouraged (Yamada, 2012, pp.41-51). Similarly, it implies that workers

will leave their jobs and go for better-paying jobs. This is because tested benefits method has

some limitation on the disposable income for low paid jobs. In my opinion, a better way of

offering minimum wages for all is through providing lower taxes for low-income earners.

Perhaps, another way out could be providing medical insurance to workers and housing benefits.

This will ultimately increase workers disposable income without interfering competitive labor

markets.
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Reference List

Anon, (2017). [Online] ‘Available at: http://The macroeconomic consequences of raising the

minimum wage: Capital accumulation, employment and the wage distribution’ [Accessed

16 Dec. 2017].

Bacache-Beauvallet, M. & Lehmann, E. (2007). ‘Minimum wage or negative income tax: why

skilled workers may favor wage rigidities.’ Spanish Economic Review, 10(1), pp.63-81.

Bauducco, S. & Janiak, A. (2017). ‘The macroeconomic consequences of raising the minimum

wage: Capital accumulation, employment and the wage distribution.’ European Economic

Review, 101, pp.57-76.

Berlatsky, N. (2012). ‘The minimum wage.’ Detroit: Green Haven Press.

Blundell, R., Fry, V. & Walker, I. (1988). ‘Modelling the Take-up of Means-Tested Benefits:

The Case of Housing Benefits in the United Kingdom.’ The Economic Journal, 98(390),

p.58.

BOYCE, J. (2014). ‘The Effect of Monopsony Power on Portioning and Unitization Regulation

of the Common Pool.’ Natural Resource Modeling, 27(3), pp.429-465.

Brown, R. & Jewell, R. (2006). ‘The Marginal Revenue Product of a Women's College

Basketball Player.’ Industrial Relations, 45(1), pp.96-101.

Carlton, D. & Perloff, J. (2005). ‘Modern industrial organization.’ Boston: Pearson/Addison

Wesley.

Cohen, H. (1972). ‘Monopsony and discriminating monopsony in the nursing market.’ Applied

Economics, 4(1), pp.41-50.

 Disposable Income of Workers on Low Pay 15

Economicshelp.org. (2017). ‘Cite a Website - Cite This for Me.’ [online] Available at

http://www.economicshelp.org [Accessed 16 Dec. 2017].

Kukathas, U. (2010). The Minimum wage. Farmington Hills, MI: Green haven Press.

Majchrowska, A. & Strawiński, P. (2017). ‘Impact of minimum wage increase on gender wage

gap: Case of Poland.’ Economic Modelling.

Navabi, A. (2017). ‘A Monopsony is necessarily a Monopoly.’ SSRN Electronic Journal.

Yamada, H. (2012). ‘Non-compliance with the Minimum Wage Law when Completely New

Minimum Wage Laws Are Established: The Case of South Africa.’ African Development

Review, 24(1), pp.41-51.