Unintended Consequences of Government Intervention

Question 1

What benefits does government intervention in the labour market have?

Answer 1

1. provide a safety net wage for low-paid workers and reduce poverty
2. avoid exploitation of employees by profit-seeking business owners keen to minimise their costs
3. increase the reward or incentive for employment and participation in work, boosting efficiency in the use of resources
4. improve equity or fairness in society by protecting and lifting the consumption levels or purchasing power or workers, and increasing the extent to which society’s wants are satisfied
5. reduce income inequality and poverty
6. allow individuals to have frugal comfort and enjoy socially acceptable living standards.

Question 2

Possible negatives of government intervention

Answer 2

There can be a trade-off between promoting greater equity on the one hand through an artificially high minimum wage and encouraging efficiency in the other.

Question 3

Setting an artificially high minimum wage can have several effects:

Answer 3

Slow the growth in labour productivity: setting artificially high minimum wages disconnects pay levels from the value of people’s work, as set by market forces. This may act as a disincentive for improving labour productivity and discourages an efficient use of resources. This will slow the growth in a nation’s productivity and reduce the sustainable rate of economic growth.
Increase our trade deficit: artificially high wages and low productivity makes local firms uncompetitive against their overseas rivals and thereby add to an international trade deficit.
Increase the level of structural employment: setting artificially high wages can cause some local businesses to closure because they are less competitive. Some may relocate overseas. Locally, this causes higher levels of structural unemployment.
Increase inequality in income distribution: by increasing structural unemployment, the setting of artificially high minimum wages can insome ways, undermine equity in income distribution.

Question 4

How does government intervention on wages also harm the economy?

Answer 4

Inequality is worsened because excessively high minimum wages discouraged employment, cause firms to reduce the number of hours that staff work and hence depress incomes and purchasing power. By increasing unemployment, they add to the number of people dependent on inadequate government welfare payments. Lower incomes and purchasing power significantly reduces efficiency and society’s general wellbeing.