Question

One of the lessons we have learned in class is that raising the minimum wage would put more employment pressure on competitively disadvantaged, unskilled workers. Furthermore, many older Americans do not have enough savings or pension for them to retire. To help resolve this problem, the government has proposed that it will provide subsidies to companies hiring workers aged 65+.

Given what you have learned about subsidies, who (employer or employee) in reality is receiving the subsidies? Start your analysis with justifiable assumptions on elasticities of Supply and Demand. Discuss whether the proposal is a good or bad idea. Explain in words and graphically.

Answer 1

Raising the minimum wages puts more employment pressure as unskilled workers are not preferred over skilled workers.

The government has proposed that it will provide subsidies to companies hiring workers aged 65+, thus the employees receive the subsidies as the employers actually pay a lower wage, but the employees receive a higher wage because of the government subsidy.

Thus the employees get $5.3 wages as government funds the gap of $2.3, whereas the firms only pay $3. Because of the lower wages, the firms are able to employ more people and thus the quantity of labor demanded increases from Qm to Qs. Because of this government subsidy, the wages increase and the employment also increases.

Thus the proposal is a good idea cause with higher wages, employment increases, otherwise under normal circumstances with higher wages, employment tends to decline because firms employ less number of people.