Question

1) How does Minimum wage cause unemployment?

A) Given that the effects of the minimum wage on employment differ based on the assumptions made about labor supply and demand (elastic vs. inelastic) and the structure of the labor market (perfectly competitive vs monopsonistic) how can economists then try to find the answer this question?

B) Carefully explain what methods economists could use to explore this social issue. Evaluate the empirical evidence and data and write your own interpretive analysis.

C) Can you think of few reasons why an increase in minimum wage would not lead to an increase in unemployment (besides the arguments you made under monopsony)? Can you think of few reasons that the unemployment would go up, even if the minimum wage stays the same? How do the answers to these questions impact the reliability of empirical data?

Answer 1

A)

The United States currently has the lowest minimum wage compared to its average wage amongst all advanced economies.

The supply and demand curves prove that a minimum wage increases unemployment and hurts the low-wage workers. That is Low-skilled labor is bought and sold in a market, just like any good or service, and its price should be set by supply and demand. A minimum wage, however, disturbs this equilibrium because it sets a floor price in the market for labor. If it is below the natural wage rate, then nothing changes. But if the minimum example say, $7.00 an hour is above the natural wage say, $6.00 per hour, it distorts the market. More people want jobs at $7.00 than at $6.00, but companies want to hire fewer employees. The result is more unemployment.

B)

Increasing the minimum wage is not a good idea because companies would then substitute capital for labor. When the minimum wage is above the market wage it causes unemployment because it reduces the number of employees whom companies can afford to hire. Wages should be left to the private sector, and should be raised based on supply and demand.

C)

An increase in minimum wage would not always necessarily lead to an increase in unemployment. For example, Some companies can’t lay off employees if the minimum wage is increased. Very large employers may have enough market power that the usual supply and demand model doesn’t apply to them. They can reduce the wage level by hiring fewer workers just as a monopolist can boost prices by cutting production. A minimum wage forces them to pay more, which eliminates the incentive to minimize their workforce.