Question

Most government policy decisions have winners and losers. Using a supply and demand model, fully explain what the effects are of raising the minimum wage above the equilibrium level. In your explanation, be sure to answer each part (below) of the question.

Part A.   Explain why policy makers may wish to raise the minimum wage, be very clear about what direct outcome they want to see.

Part B. Fully identify the winners and the losers from raising the minimum wage. Be sure to identify what some “win” and what some “lose.”

Part C. Identify some policy alternatives (at least 2) that might have an outcome similar to the minimum wage on the policy goal or goals you identified in Part A. and explain each in the context of a supply and demand model.

Answer 1

A. Policy makers may wish to raise the minimum wage for several reasons. One of them could be related to efficiency wage hypothesis. In labor market, efficient wages are the wages that maintain the incentivities for any labor to be productive. If the equilibrium wage is below the efficient wage ,policymakers might want to raise the minimum wage. Also if the equilibrium wage is too low, to raise the social welfare, policymakers would want to increase the.minimum wage

B The winners in this case are suppliers of labor.i.e.the employee who will receive higher wages now and the losers are the ones demanding labor i.e..employer who will pay higher wages now. But, at the same time there would also be excess supply of labor in the market which would lead to unemployment in the economy which is a loss for job seekers or workforce

C. One policy alternative could be reducing the regulations on starting up a business or ease of doing business. This initiative would lead to an increase in demand of labor which would eventually raise the wages in the economy. One advantage of this alternative is that it would not lead to excess supply that was created in minimum wage policy.