Question

Economics Assessment: Social Responsibility

On July 24, 2009, the federal minimum wage rose to $7.25 per hour for most occupations in the private sector. While many states and cities have set their own minimum wage above this federal level, and 18 states raised their minimum wage on January 1, 2018, the federal minimum wage has remained at $7.25 per hour. Over the past several years, support for an increase in the federal minimum wage has come from a wide variety of sources. Many of those who support an increase in the minimum wage believe this is one way the government should exercise its social responsibility in an attempt to reduce poverty. The following items address the idea of raising the minimum wage from the current federal minimum of $7.25 per hour.

1) Minimum wage is a price floor, so discuss an increase in the minimum wage from a supply and demand standpoint, making sure to address the concept of surplus with respect to the quantity of labor supplied and the quantity of labor demanded that is generated by this price floor.

2) What will be the impact on the prices of the products produced by workers working at or near the minimum wage level, and how will this affect overall consumer purchasing?

3) Discuss any potential changes in the incentives for low-skilled workers to increase their human capital, and for employers to substitute capital inputs (technology and automation) for labor.

4) What might be the impact on government spending on entitlements such as welfare, food stamps, and unemployment compensation in light of the fact that changes in the minimum wage can create changes in unemployment and underemployment?

Based on your responses, do you believe that the minimum wage should be raised, lowered, remain as it currently is, or be altogether eliminated? Explain your answer, and make sure to address any social responsibility the government should have regarding the well-being of its citizens with respect to the setting of wages in the private sector.

Answer 1

1) Minimum wage is a price floor, so discuss an increase in the minimum wage from a supply and demand standpoint, making sure to address the concept of surplus with respect to the quantity of labor supplied and the quantity of labor demanded that is generated by this price floor.

ANSWER: The increase in the minimum wage leads to a fall in the level of employment. The employment falls because the higher minimum wage means that more people would people will be motivated to seek employment, however as labor is now more expensive to firms, thus they will want to use fewer hours

2) What will be the impact on the prices of the products produced by workers working at or near the minimum wage level, and how will this affect overall consumer purchasing?

ANSWER: An increase in the minimum wages would mean an increase in the cost of production to the firms. The rising cost of production is in the form of wages, which are variable costs. It will result to a fall in the consumer purchasing power especially if their disposable income remains constant. The reason is that the producers will always wrap the increased costs and carry them to consumers who will bear the burden so as to maintain the level of profits for the firm

3) Discuss any potential changes in the incentives for low-skilled workers to increase their human capital, and for employers to substitute capital inputs (technology and automation) for labor

ANSWER: Increased minimum wage is a great incentive to low-skilled workers, and they will spontaneously increase in numbers immediately a minimum wage is increased. On the other hand, employers will prefer to substitute workers with the capital particularly where the use of technology is cheaper than human labor. Additionally, employer will keep only skilled labor, and especially those who are the least productive will not get work, thus leading to unemployment in the economy

4) What might be the impact on government spending on entitlements such as welfare, food stamps, and unemployment compensation in light of the fact that changes in the minimum wage can create changes in unemployment and underemployment?

ANSWER: Due to the increase minimum wage from the original equilibrium, it will leave the employers unsatisfied because they will be losing money, and therefore they will increase the price of their goods which could result to inflation in the economy, indicating the fall in the purchasing value of money. Thus now the role of government’s should be to take a social responsibility to ensure that the costs and prices of products do not increase so much or do not increase at all. Thus, consumers are protected from an abnormal increase in the prices of products