ECO402 GDB Solution Spring 2023

                                                                        

ECO 402

GDB Solution

Spring 2023

 

 

Question Description:

 

Case:

Price floor is a minimum price at which a service or product is permitted to sell. The most important example of a price floor is the minimum wage, which imposes a minimum amount that a worker can be paid for their services. As the cost of living rises over time, government of Pakistan has decided that the minimum wage for workers should increase. In the budget 2023, the finance minister of Pakistan announced that the minimum wage has been increased to Rs 32000 from Rs 25000.

 

Requirement:

Keeping in view the above scenario, logically discuss the impacts of the government decision on producers and workers.

 

Solution:

 

The government's decision to increase the minimum wage from Rs 25,000 to Rs 32,000 in Pakistan will have several impacts on both producers and workers. the actual impact of the minimum wage increase will depend on various factors, such as the overall economic conditions, the specific industry, and the ability of businesses to adapt to the new wage requirements. Additionally, government policies and measures to support businesses and workers in adjusting to the higher minimum wage can also influence the overall outcomes.

 

The increase in labor expenses has the most effect on producers. A higher minimum wage will force employers to set aside more money for employee compensation. The profit margins can decline as a result of this. If better productivity or higher pricing are not able to make up for the higher labor costs, producers may see a drop in profitability. Producers may increase the cost of their products or services to offset the effects of rising labor expenses. However, if customers believe the higher prices are out of reach, this can limit consumer demand. On the other hand, the increased minimum wage aims to raise workers' living standards and make it easier for them to meet their essential needs. By guaranteeing that workers receive a more equitable share of economic gains, a higher minimum wage can aid in the reduction of poverty and income inequality. For workers who are at risk, it can act as a safety net and assist them escape poverty. When labor prices rise, some firms could find it challenging to maintain their current workforce and turn to staff reductions or a reduction in employing new workers.