Question

A popular topic during election years is the topic of minimum wages. The current favored minimum wage appears to be $15.00. Using a supply and demand graph for the low-wage labor market (the “price” of labor, or wages, on the vertical axis), illustrate the theoretical impact of imposing a $15.00/hr minimum wage if the current market is in equilibrium at $10.00/hour.

1. Is the minimum wage a price floor or a price ceiling?

2. Explain the impact of the $15.00 minimum wage based on your graph?

3. In an age of fast technological advances, are there other ways that a higher minimum wage could backfire for workers?

4. Does advancement in technological impact all types of labor the same way, or does it pose different challenges for different types of workers in the economy? Explain.

5. Can you think of other ways to provide income assistance to workers without directly intervening in the market for labor with a minimum wage policy?

Answer 1

1. If the equilibrium wage is $10/hr and a minimum wage is imposed of $15/hr, then there will be an excess supply of workers, exceeding the demand for workers leading to the economic phenomenon of unemployment.

2. Minimum wage is a price floor policy of the government.

3. When the minimum wage is imposed above the equilibrium level, there is an excess supply of labour as compared to the demand of the labour, leading to the unemployment in the economy. So, with this minimum wage, government has to provide the remaining unemployed workers with more scope of employment.

4. Yes, in this era of high technology, more workers can be given employment in response to the excess supply created due to the imposition of minimum wage.

5. It poses challenges for different type of workers in the economy. It favours the formal sector workers which have worked in the organized sector and is unfavourable to the informal sector workers who cannot reap the benefits of the same.

6. Direct benefit transfer is an important way other than the minimum wage. It directly subsidizes the worker without intervening with the market equilibrium and hence no excess demand nor excess supply is created for the workers, incentivizing both the workers and the firm to supply and demand labor.