Question

The Texas Senate and Governor has hired you as an economic and policy advisor. Your clients would like to know if they should raise minimum wages, inclusive of the minimum wages of wait staff. What are your policy recommendations?

The macro argument should involve theories learned from

CPI, GDP Economic Growth, Aggregate Demand and Aggregate Supply, Multiplier effect, Public Policy Fiscal and Monetary policy etc

Answer 1

Imposing minimum wage is an example of price floor which occurs when price (P1) is raised above the market clearing equilibrium price of P*.

• Raising minimum wage will raise producer's cost which induce them to raise price of goods to cover the lost profit which will raise CPI.
• In short run, demand of labor would be Q2 and supply of l;abor would be Q1 which will result in surplus of labor equal to Q1 - Q2 where many labor will loss their jobs. It micght reduce economic growth.
• Aggregate supply will fall at this wage rate because less labor is gettting employed while aggregate demand will rise as aggregate supply falls. It will reduce the wage paid to labor till it reaches the equilibrium.
• Multiplier effect occurs when spending by one individual become earning of other and this pattern continues. As labor is hired at higher wage rate, they will spend less of their wages on consumption which will reduce MPC hence multiplier.
• Government on the other hand could adopt expansionary fiscal policy to reduce tax on labor which will raise economic growth.