Question

In: Economics

The federal minimum wage in the United States is currently $7.50 per hour. Joe Biden, the...

The federal minimum wage in the United States is currently $7.50 per hour. Joe Biden, the Democratic candidate for President, proposes to increase it to $15. Based on your knowledge of the elasticity of labour demand for low-wage workers, how would you expect Biden’s plan to affect:

a. Employment of low-wage workers. Be precise.

b. Earnings of low wage workers. Be precise.

c. Prices of goods produced with low-wage labour. Explain and illustrate.

d. Summarize the effects of this tax and transfer policy on different groups, i.e. who gains and who loses from this policy?

Solutions

Expert Solution

a) According to Joe Biden's proposal for increasing the minimum wage rates from $7.50 to $15 per hour can affect the cost of production to increase. The producers can shift the extra cost of labour wages to the customers in form of increased prices only when the demand for the goods and services is inelastic in nature.

Hence, the employment of the low-wage workers will also depend on the demand elasticity of the goods and services in the market. If demand is more elastic to price change then the employment of low-wage workers could be replaced by other capital inputs which can further enhance the production process with hiring lesser number of workforce also.

b) As the minimum wages of low wage workers will just be doubled in number, it will increase their standard of living, their consumption capacity, purchasing power, etc.

But as demand of labour is elastic in nature to its wage rates it can cause the situation of major unemployment among the low wage workers. As the producers and manufacturers will prefer other modern techniques for production to overcome the increased wage rates and maintain the cost effectiveness and demand of their products.

c) The affect on prices of the goods produced using low wage workers will also be huge. As the raised minimum wage rates ($15) of the workers will increase the cost of production too in comparison to initial minimum wage rates (&7.50). Therefore, increasing the prices of the goods in the market and its demand too if it is price elastic.

d) It will be a situation of partial gain and loss both in the case of low wage workers as depending on the market scenario (introduction of modern tools and techniques in the production process and replacing low wage workforce) and demand elasticity of the goods and services.

For the manufacturers and producers it will a situation of loss only as they will be the only one to manage the increased minimum wages, maintaining the cost effectiveness, quality and demand/supply of their goods in the market. If unable to bare the increased wage burden they will have to switch to other production methods replacing the workers. This will lead to labour unions protests and strikes.

On increasing the minimum wages of the workers, government will do a kind of spending which will be sourced from the taxes incurred from general public. Hence, the burden of the increased minimum wage rates will fall on the pockets and incomes of general public in form of increased taxes.

The taxes may be direct or indirect, like when the increased wage rates will add up in the cost of production of the goods and services, its prices will rise automatically in the form of increased GST(Goods & Service Tax).


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