Question

Discuss the impact of increasing minimum wages on the labor market...cite examples

Answer 1

Impact of increasing the minimum wage is reduction in employment.

Increasing the minimum wage is an increase in cost of production because labor is an input in production of goods. When this cost of production increases, employers choose to hire lower level of workers. They either tend to shift to other inputs if possible or reduce level of output. In both cases demand for labor falls. This results in increase in unemployment.

David Neumark studied the relationship between unemployment rate and increase in minimum wage among 410 restaurants in New Jersey. Wage rate was increased from $4.25 to $ 5.05 in 1992 by government. He found that unemployment did increase with increase in minimum wage.

Also if employment does not fall initially, it will fall later on. If there is no price rigidity, increase in wage leads producers to increase price. With increase in price quantity demanded falls. Lower level of goods are produced in the market with lower level of employment.

Thus we can conclude that increasing minimum wage might not help workers, it might even hurt them.