Question

You live in the city of San Francisco and your mother asked you about an article she just read that said an increase in the city's minimum wage would increase prices at city restaurants and not lead to a decrease in employment in the the city's restaurant industry. In the article the local labor leaders said that in the past increases in the minimum wage were not followed by layoffs. Back in the day she took an economics course in college and knows that you are now studying economics and she asks you to explain how this can happen. You sketch a diagram of the labor market in which you assume that the initial wage is $5, and the hike in the minimum wage is $2. You recognize that restaurants may be able to shift costs forward. You also sketch the market for restaurant dining in San Francisco. For simplicity you make the assumption that the demand for restaurant dining in San Francisco is perfectly inelastic. After sketching the forward shift of the full cost of the minimum wage hike you then show your mother the feedback effect in the labor market means no decrease in employment in the San Francisco restaurant industry.

1: What is your initial analysis concerning the effects of the increase of the minimum wage?

Answer 1

My initial analysis concerning the effects of the increase of minimum wages is that with an increase in the minimum wages of the workers working in the restaurant industry their inmomes will increase and hence their demand will also increase, this will increase their consumption and hence standard of living. But the other case may be that with increase in income and hence demand if the supply of goods and services do not increase in the economy it may lead to a higher inflation rate.

Since I have assumed that the demand for restaurant dining is perfectly inelastic so I got the result that it will not increase unemployment, but this is not the case in real world, as the price for restaurant dining increases the demand decreases, this will lead to a decline in profit of the restaurants and hence they will think to let off some of their employees and hence it may lead to an increase in unemployment in the city.