Question

In: Economics

If the legal minimum wage were increased, from its current rateof $7.25 an hour, gradually...

If the legal minimum wage were increased, from its current rate of $7.25 an hour, gradually in steps up over the next 4 years, to $11 an hour (about a 50% increase), describe THREE different possible effects on labor markets (via workers and employers)--at least one positive and one negative:

Solutions

Expert Solution

Minimum wages are seen as a measure across the globe, to increase the living standards of people in the country. Maximum number of people in developing and underdeveloped economies happen to work at this wage and earn minimum levels for themselves. Over the years, as cost of expenditure increases and the inflation levels rise, the governments have to increase the minimum wages so as to be sure that the living standards of the marginal group that lives on the edge can be stable and their access to facilities such as healthcare, education etc can be maintained.

The following are the positive and negatives of increasing the Minimum Wages: -

Positives: -

1) Increasing the Overall Demand

With a rise in income levels of the marginal group, their purchasing capacity increases this on the aggregate side sees a big impact and the overall demand in the economy increases. This is good for the economy as the GDP or the gross domestic income would increase over the years as per the planned increase in minimum wage levels.

2) Life Style Changes: -

With a rise in the minimum wages, as explained above, people begin to demand more goods and services in the economy. Accordingly, their access to facilities such as education, health care and nutrition also increases. This leads to a general increase in the overall life style of a citizen which improves over a period of time,

Negatives: -

1) Outsourcing: -

The result of an ever-increasing minimum wage is that countries such as the United States have taken most of their production abroad to countries such as China which offer low cost production as not a lot of skills are required to complete the manufacturing process. Further, if the trend continues, companies could look to hire lesser from the local economy which creates unemployment and deep problems for any economy.

2) Inflation: -

If supply is not able to catch up with the increase in demand caused by the raise in the minimum wages, the end result would be inflation in the economy, which at no point is good.


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