Question

Minimum wage has been a hot topic in recent years. How could increases to the federal minimum wage level effect unemployment? Using macroeconomic theory, offer a valid argument as to why the federal minimum wage rate should increase or remain relatively low as it has been for years.

Answer 1

An increase in the minimum wage will only result in an increase in the unemployment and lower the output of the economy because when the wage increases the prices of the goods will increase as the producers will try to increase the price of goods by reducing the supply to justify the increase in the cost of production.

Also,an increase in minimum wages increases unemployment in the economy particularly for the low skilled workers because when wages increases,the demand for low skill workers will decrease and the demand for high skilled workers increases and as the low skill workers constitutes a major portion of the labor force,they will be unable to find jobs in other industries which will increase the unemployment.

An increase in unemployment will in turn increase the total welfare payments being spend on different welfare schemes as more and more people will be in need of it with an increase in unemployment which will affect the economic condition of an economy negatively.So, it is better for the minimum wage to remain low and instead focus on to increase the jobs where the low skill workers can be trained to increase their skills and check on inflation in order to stabilize the purchasing power so that an increase in the minimum wage is not required.