Question

Since 2009, the national minimum wage has been $7.25 per hour for most occupations in the private sector. Many of those who support an increase in the minimum wage believe this is one way the government could possibly reduce poverty, while its opponents believe that it creates unemployment and hurts low-skilled workers. The following items address the idea of raising the minimum wage from the current federal minimum of $7.25 per hour.

1) Describe who the suppliers and demanders are in the labor market. Is a government-mandated minimum wage a price floor or ceiling? Discuss the effect of a minimum wage law from a supply and demand standpoint, making sure to address the concept of surplus or shortage.

2) Raising the minimum wage will also affect the labor costs of businesses. What is going to happen to the prices these businesses charge for their products? And who is going to be most affected by these price changes, those with low incomes or with high incomes?

3) Discuss any potential changes in the incentives for low-skilled workers - those who keep their jobs and their hours - to increase their human capital when the minimum wage increases. What about those who lose their jobs or never get hired? Discuss the incentives for employers to substitute capital inputs (technology and automation) for labor.

Answer 1

1) A market is the place where the buyers and suppliers exchange the goods or services in the lieu of money.
The labor is also kind of market where employers are the one who demand services of labor and employees or working age people who are willing to work at that wage rate provides the services. The quantity of the labor demanded and supplied as well as wage rate is decided by the market forces.

The government sometimes interferes in the market to reduce the poverty level or to stop the exploitation of the labor by increasing minimum wage. The government mandates a minimum wage which is kind of price floor in the market.
Generally, the price floor is set up above the equilibrium level and so it creates a surplus in the market.
The unemployment number rises because of this price floor.

2) The labor is also an important input in the production or manufacturing process. The rise in the input cost increases the final price of the product and naturally the price charged to the end user or customer. The higher price of the product means the rise in inflation in the economy. A higher inflation means a higher burden on the marginal section of the society or those with low income. They have to increase the chunk of their of income on buying those products. It affects low income people adversely than high income people.

3) The employers will reduce the workforce to comply the minimum wage law as they will pay minimum wage to few workers but will increases their working hours to compensate the reduced workforce. The employers will also look for using technology or automated machines to replace human workers as they are not subjected to recurring cost of wages or minimum wages.
The employers will be less willing to higher low-skilled workers because the minimum wage mandates to pay them higher. Such workers then have incentive to enhance their skills to be competitive in the market. The re-skilling or getting  knowledge of new technologies processes will help them to increase their human capital. However, it is quite possible that increasing minimum wage may force low-skilled people out of the job and they could become incompetent in the market.