Effect of Minimum Wage on Demand and Supply Assignment

Effect of Minimum Wage on Demand and Supply Assignment Words: 1495

In order to safeguard specific workers in low-paid, susceptible employments the minimum wage policy had been implemented by the South African government to provide assurance to these workers off basic subsistence income. In hindsight the government saw the wage floor’ as a tool to efficiently support the working poor and eradicate their poverty while facilitating the rearrangement of Income in an uneven society. In light of the recent strikes brought forward by the framework’s in the Western Cape that ultimately form part of the agricultural sector, Agricultural

Minister Mildred Olefins has implemented a minimum wage policy of REAR that is to take place as of the 1st March, FIN 24 (2013). This however is ROR above the current minimum wage and can have adverse effects on the economy as a whole. On a broad perspective many farm owners are faced with a tough decision in terms of sustainability and having to retrench or replace workers with capital or automated systems, stated by several farm unions, Grass and The Transvaal Agricultural Union (TAUT AS).

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This essay will focus on the consequences of the increase in the minimum age price in conjunction with the agricultural sector with regard to the demand and supply framework. Effects in the long and short run will be discussed, along with the influence of unions on the issue, keeping in mind the finer detail that compromise of the farm owner’s expenditure and assets and weather dismissal or replacement is a necessity. The customary method of illustrating the analysis of the Impact of the minimum wage Is to adopt an equilibrium approach to graphical Illustrations.

In figure 1, the graph depicts the factor market reaching full employment (LO) equilibrium at the market clearing or equilibrium (WOO). Unemployment is apparent with the introduction of a minimum wage (WI) due to the mere fact that supply supersedes the labor demand at this new higher wage level. Al subtracted from LO represents the amount of people that will be unemployed. Reference: (Indicated by # In list) https://blobs. Yells. Cup/biker/2013/0111 3/ economics-blob-post-assignment-2-price-control-minimum-wage/ Reference: (indicated by # in list) https://blobs. His. AC. JP/biker/2013/01113/economics-blob- post-assignment-2-price-control-minimum-wage/ Figure 1 : Demand and Supply of Labor and the Impact off Minimum Wage This model can Ideally be used to Illustrate the Impact that the new Mullen wage law has on the agricultural industry in South Africa. Whereby the WI figure will represent the new current minimum wage of REAR and the Woo value will represent the market equilibrium.

With the new current implementation of the minimum wage in South Africa many labor intensive farms, mainly small scale, will not be able to afford to cover operating costs and this can create a knock on effect In the industry and economy. Ultimately due to the minimum wage Increase would result in a by the law of demand and would result in increase in supply of labor as stated by the law of supply, the annual FAA report concluded that a 10% – 28% decrease would occur if a ROR increase in minimum wage occurred, FAA (2013)..

This value could theoretically increase on the basis that the actual increase in minimum wage is ROR. Consequently, in the short run the dismissal of seasonal and unskilled workers would occur, cost effective methods can also be achieved by cutting back wages for other, higher-paid workers. Deputy Agriculture Minister and Freedom Front Plus leader Pitter Mulled (2013) said “”Where permanent workers will not be affected so much by the new wage determination, it will lead to the dismissal of tens of thousands of seasonal and temporary workers”, FINIS (2013).

Labor models also suggest that there is a negative relationship between employment and wage. If there is an increase due to large real wage due to a statutory minimum wage, there might be significant unemployment if the unit cost of labor increases. Figure 2 illustrates the effect of the decrease in demand of labor due to the increase in the minimum age, and accordingly wows how supply increases in order to reach equilibrium at this point.

The law of demand states that an increase in price results in a decrease; the law of supply states that a increase in price results in an increase in supply. These laws directly relate to what would happen in the agricultural industry with regards to employment and labor when the minimum wage increases, in the short run and ultimately the long run. Wage Rate Supply After Supply Before Equilibrium Wage After Equilibrium Wage Before Demand Quantity of Labor Figure 2 : Demand and Supply of Labor in the short run

Farmers will eventually suffer in the short and long run regarding the total revenue that they receive and experience lower profits. Dire consequences could arise as some farmers will have no work force and large amounts of land consequently suffer immensely and required to shut down. Primarily in the short run farmers would make structural adaptations and include mechanization and consolidation to become efficient and cost effective. With technology not being readily available and the current financial position of farmers, the newly reformed transformation may be unattainable.

The growth of technology occurs at a rapid rate and thus in the near future and in the long run farmers with more stable financial position will be able to structurally adapt farms to accommodate mechanization and omit manual labor. The minimum wage paid to season workers in conjunction with dismissal of various seasonal workers results in the inefficiency to provide a healthy diet for themselves in the short and ultimately long run, FAA (2013).

Food security can somewhat be ensured through employment in the agricultural industry, but it cannot be expected o solve poverty, a consequence that is bound to occur in the short term and will be paramount in long term. If however the industry is able to expand under favorable economic and political conditions then mechanization should occur thus changing seasonal workers into permanent ones and somewhat resolving the short and long term effects. Mentioned before, farmers somewhat find great difficulty in covering operating expenses, in extreme cases farms happen to expect a negative net income FAA (2013).

A staggering one fifth of an average farms cost consists of wage expenses, Beatrice Concordia (2003), in relation to a report compiled by the National Agricultural Marketing Council, which showed that permanent labor consisted of an astounding 23. 1% over a three-year moving average, followed by the cost of fuel, oil and lubricants at 18. 8% – with relation too livestock farming Lonely Donnelly (2013). Increased minimum wages thus results in farmers strategically substituting labor with capital in order to accommodate higher wage rates and produce efficient income I. . Structural adaptations would occur such as mechanization and installation therefore the prospect of the layoff of workers is plausible. However, Recent data indicates that demand for South African agricultural products is not only holding steady, but is in fact growing, Sweeten Live (2012), this means that farms will undoubtedly generate income in the near future and therefore the layoff of workers would not ideally take place. Trade unions ultimately have a large proportionate influence on the market that is in the best interests of farm workers.

The AS Clothing and Textile Workers’ Union (Cactus) say that they pledge to act out of solidarity to achieve the goal of a living wage and appropriate work for susceptible workers (newest). The Congress of South African Trade Unions (Coasts) has threatened to revive the strikes because farmers allegedly dismissed workers unfairly. Business Day Live (2013). With regards to the minimum wage COASTS and the unions have commanded that a solution is implemented even if it must supersede the current legal framework, Anton Arab (2012), powerfully illustrating the impact that unions can have on the market.

The South African agricultural sector has been placed in a official situation with regard to the implementation of the minimum wage that took place 18 days ago. In retrospection the policy applied by the Labor Minister has caused a stir amongst the agricultural economy. This essay discussed the relevant consequences with respect to the demand and supply framework. Seeing that wage expenses form a large proportion of the total annual expenses, farm owners find would consequently result in a decrease in demand for unskilled agricultural labor.

For farmers to balance their books or maintain profits – which will occur in the long UN – they dismiss seasonal and unskilled workers or implement a cost effective method whereby wages for other, higher-paid workers are cut back. The output on farms was kept constant by higher labor productivity, substitution between labor and capital (increased mechanization) or a combination of the two as the long-term trend. While some farmers suffered the plight of losing arable land, some seasonal workers were unable to obtain the required healthy diet needed for one to survive.

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