Question

Graphically illustrate (using the Wage setting and Price setting relations) and explain the effects of an increase in the minimum wage on the equilibrium real wage, the natural rate of unemployment, the natural level of employment, and the natural level of output.

. Based on your understanding of the labor market model presented by Blanchard (i.e., the WS and PS relations), explain what types of policies could be implemented to cause a reduction in the natural rate of unemployment.   

Answer 1

Generally increasing minimum wages lead to inflation and unemployment. Increasing minimum wages on the equilibrium real wages increased the spendings and young students and freshers are in the pathetic situation of not getting job and lay off. So this is increasing the natural rate of unemployment. This increased rate of unemployment leads to natural level of output, as the natural rate of employment is decreasing.

To cause a reduction in the natural rate of unemployment, the following steps may be considered;

Natural rate of unemployment is inverse in nature with natural rate of employment. So decreasing the minimum wages could be a solution to reduce number of lay offs and to generate new jobs for the freshers as well.

The benefits offered to the unemployment should be revised and reduced to an optimal level.

Widening the business targets and competitive market share.