According to the theory minimum wage policies are put in place to ensure individuals maintain quality of life Minimum wage laws seek for economic equality where companies are forced to pay individuals equal regardless of sex race among other features This theory argue that minimum wage forces companies to lay off some workers to cut labor expenses which in turn puts those employees in poverty trap Economic theory argues that minimum wage ensure unskilled workers are compensated for their services Minimum wage laws do not benefit long term or skilled employees However it forces the high paid employees to demand for increased wages as the companies increase the wage for low paid employees to minimum wage level According to economic theory employees are paid based on their skills rather than having dependants or not Minimum wage increases the cost of doing business and this force firms to raise the prices of their products to accommodate the extra expense of paying a higher wage Leonard 2000 The demand for labor is also reduced Minimum wage should consider market equilibrium wage to be effective and useful This helps in maintaining the overall employment Marginal revenue productivity theory of wages is a neoclassical economic theory which argues that the level of wages paid is equivalent to the marginal revenue product of labor Firms are after making profit and they therefore ensure the payments done for factors of production balance with marginal productivity Workers are hired up to the point when the wage rate equilibrates with marginal revenue product Minimum wage allows the firms to ensure they operate in a perfect competitive market Marginal productivity theory argues that wage rate is determined by interaction of demand and supply
According to this theory the wage rate of all employees depends on marginal productivity They treat labor as homogenous factor whether skilled or non skilled Small businesses reward their employees based on the marginal productivity The cost of labor is gained from the sale of the output of labor and therefore the input of the workers should be ensured that it increases substantial output for profit maximization Mazumdar 1959 Necessity theory argues that individual choices are based on economic wants and needs Minimum wage limits the freedom of people to choosing necessity for survival rather than for luxury According to the theory the cost of living should be used to determine the minimum wage For employees minimum wage set in a country should equal to survival wage Brecher 1974 Minimum wage can be increased based on the productivity It should be above the lowest living wage This is because cost of living differs from one country to another and even from one county to another The skills of workers should not determine the minimum wage but the cost of living According to this theory small businesses are forced to pay minimum wage which meets the cost of living and this may force them to quit if they do not meet minimum wage rates Neoclassical price theory argues that mandated minimum wages forces firms to reduce labor demanded Employees in firms that product which is worthy than new minimum are paid higher wage while those in firms that have product below new minimum are laid off or work few hours The consumer good determine the unit of price of labor and the level of employment Minimum wage aims at improving the lives of working people The minimum wage benefits unskilled laborers who are low paid and at the same time low wage workers lose employment Small businesses may suffer from minimum wage if they are not doing well in the economy Vercherand 2014