Minimum Wage and VAT Changes Take Effect

Based on the article (http://www.bbc.co.uk/news/business-19731923), it is about the minimum wage that imposed by UK government in order to increase the earning of lowest paid workers. The regulation that makes the wages to be illegal to charge a price which is lower than a specified level is known as price floor. 

The graph above shows that the market equilibrium before the price floor has been imposed by UK government. The equilibrium wage rate will be at W and equilibrium quantity of labour hours is equal to L.

When a price floor is applied to a labour market, it is called a minimum wage. A minimum wage is always set above the equilibrium wage in the market. Based on the graph above, assumed that the minimum wage rate is at W. Any wage rate which is below W will be considered to be illegal. 

The minimum wage reduces the quantity of labour demanded to Ld and increase the quantity of labour supplied to Ls. It is because more people are willing to work at a higher wages rate but the numbers of workers needed is decreases. With the lower quantity of labour demanded, some workers are willing to supply with wage rate of W’ per hour, which is even lower than the previous equilibrium price (W per hour) in order to get the job. 

The main purpose of government to impose a minimum wage is to help the workers in order to earn a higher wages. However, when the wage rate is increase, the number of workers demanded by the employers may reduce. This will lead to some of the workers losing their jobs. 

Besides, assume there is a case that worker A earned $500 per month and worker B earned $1000 per month before the imposing of price floor. However, after the imposing of price floor which is equal to $800 per month, worker A will benefit from it as he has an increase of wage rate but worker B will definitely worse off. Therefore, it proves that the gain from minimum wage will depend on the current salary of labour. 

Furthermore, when the quantity of labour supplied is greater than the quantity of labour demanded, there is a surplus of labour which is also known as unemployment. The amount of unemployed labour will equal to the difference between the quantity of labour supplied and the quantity of labour demanded in the market (Ls-Ld).

Based on Graph 3 above, this shows inefficiency of the labour market. As the quantity of labour employed is less than the efficient quantity, deadweight loss occurred which is shown in grey shaded region. The consumer surplus will shrink to the red triangle and the producer surplus will also reduce to blue triangle. The yellow rectangle shows there is a potential loss from job search. 

In addition, the black market may occur due to workers are desperate for looking jobs and they are willing to work on $4 per hours which is lower than price floor ($8 per hours). If most of the company will like to do so, then the policy of minimum wage is considered inefficient. Therefore, Government should minimise the number of companies which takes the opportunity to employed low-paid workers. Government can also come out with a regulation so that workers who have wages rate which is lower than price floor can complaint to the government. Thus, most of the company will worry about their companies’ image and will follow the policy. 

On the other hands, is the minimum wage fair to everyone? The labour market consists of skilled workers and unskilled workers. Therefore, if every worker in the labour market earn the same amount of wages, it is unfair to those more knowledgeable and skilled labours. When the government set a price floor to the whole country, it is also unfair to everyone as there are city and town areas in the country. The citizens who live in a city have a higher living of standard which needed a higher living costs compare to those living in a town. Moreover, the productivity of a company in different area are also varies as the technologies used are different as well. 

Another issues based on the particular article will regardless the VAT which means value added tax. VAT is a type of consumption tax that is on various stages of production. It is normally not identical and usually is paid fully by the consumers. This can also mean that none of the consumers can escape from these taxes. 

Based on the case in the article, UK government is going to increasing the amount of VAT on hot takeaway food, the provision of self-storage facilities, approved alterations to listed buildings, sports drinks, and the rental of hairdressers' chairs which will impact on the young people as most of the products are consumed by them. 

When the VAT on those goods increases, the supply of the goods will reduce as the cost of production of the products is higher than previously. The supply curve will shift to the left and results in higher prices and lower quantity demanded for those particular goods. It is because based on law of demand: when the price becomes higher, the consumers tend to buy lesser. 

Furthermore, the effect of VAT on the producers and consumers will depend on the elasticity of the curve. When then demand curve is elastic, which is shows in orange in the graph above, an increase in the tax will result in a big changes in the quantity demanded. However, if the demand curve is elastic, which is in green, an increase in the VAT will not have a big impact on the changes of quantity demanded. 

Although government impose a minimum wage to assist the low-paid workers, they increase the VAT on the same time which makes their disposal income remain unchanged. As the price floor is imposed, company will tend to employed those skilled and experiences workers instead of the inexperience youngest. Therefore, when the young people cannot get a job and their cost of living is increases due to increased in VAT, the crime rate in the society may eventually increases as well. Therefore, government should consider how to solve those problems such as unemployment and crime rate in the society. 

In conclusion, there are advantages and disadvantages of any choices that we have made in decision. Government should consider more when they imposed minimum wage as it can only benefit some of the workers but not everyone in the labour market.