Question

1- Explain who will get the most and the least benefit of increasing the minimum wage

2- If you could set the minimum wage, what things would you consider for how high or low it should be?

3- increasing the minimum wage to $15

(a) Is this an example of price control? Is it a price ceiling or price floor?

(b) What does classical economics suggest will happen based on you answer in (a)?

Answer 1

1- When there is a case of increasing the minimum wage, it is the unskilled worker that suffers the most because it is highly likely that unskilled workers are the ones that are laid off initially. Firms still prefer to give jobs to skilled workers or they might replace them with automation. Highly skilled workers benefit because now they are able to receive a higher wage. Employers also suffer since wage bill increases and their production is reduced.

2- If you could set the minimum wage, you should observe labor market frictions and elasticity of demand and supply for labor. If demand for labor is highly inelastic, minimum wages can be set at a higher level because then loss of employment is minimal. However when demand/supply are fairly elastic, wage rate should not be increased much because even a smaller increase in wage would reduce employment by large.

3- increasing the minimum wage to $15

(a) This is an example of price control as it sets the legal wage above the market wage. It is a price floor.

(b) Classical economics suggest thats firms will observe a higher than market wage so they will cut employment, and will attempt to substitute for high- skilled labor and would lay off the less-skilled labor units.