Minimum Wage Effects
Economic Effects of Minimum Wage The minimum wage in the United States of America sets the standard of living for all of its citizens by placing a price floor on what amount is acceptable to pay a person for typically unskilled labor. Minimum wage can be traced back to Fair Labor Standard Act in 1938. It was 60-75 cents per hour at the time. However, it has been revised upward due to inflation and pressure from trade unions and interest groups. Interest group argue that raising the minimum wage is a central tool in reducing poverty among unskilled workers in the US. Stigler (1946) argued that minimum wage legislation can be an instrumental tool in eradicating absolute poverty if it combined with other policy measures that are intended to create
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This is because the purchasing power of money is eroded over time with an increase in general price levels caused by inflation. Minimum wages has been a central debate in the American society since the inception of minimum wage legislation. It has attracted both academic and professional interest as various parties argue for while others argue against minimum wage legislation. This paper seeks to evaluate both sides of the divide.
As previously stated, the push to raise the minimum wage in America is not without opposition. Most notably, economists argue that if the minimum wage were to be raised across every state in the country, employers would have to increase prices of goods and services to compensate for the higher cost of employment. However, if the elasticity of demand does not allow, employers would have to bear part of the costs. Consequently, they have to lay off some workers to avoid the increase in production costs. Similarly, there is an inverse relationship between labor demand and the price of labor (wages). Therefore, raising the minimum wage results in a reduction in labor demand hence …show more content…
A monopsony refers to where there is only one demander and many supplier of goods. In this case, it is the supply and demand for labor. A monopsony pay a low wage because he is the only demander. Increasing the minimum wage only extracts rents from the demander and increases supply of labor thus increasing employment. A minimum wage makes the employer a price taker and hence he behaves competitively thus increasing employment. This model perfectly fits the US economy because there are few employers and very many employees and potential employees. Brown, Girloy, & Kohen also argue that if employers are not productive they will experience shock effects of increase in operating costs with a minimum wage. This will force them to improve their productivity in order manage their operational costs. Therefore, the negative impact of minimum wage is mitigated.
In conclusion, minimum wage legislation has both negative and positive consequences on the economy. The demand-supply framework shows that minimum wage legislation results in unemployment. However, it should be appreciated that raising minimum wage increases aggregate demand hence boosting economic activities. In case of a monopsony, it will result in increase in labor demand. In addition, firm productivity may increase due to employee motivation and
This is because the purchasing power of money is eroded over time with an increase in general price levels caused by inflation. Minimum wages has been a central debate in the American society since the inception of minimum wage legislation. It has attracted both academic and professional interest as various parties argue for while others argue against minimum wage legislation. This paper seeks to evaluate both sides of the divide.
As previously stated, the push to raise the minimum wage in America is not without opposition. Most notably, economists argue that if the minimum wage were to be raised across every state in the country, employers would have to increase prices of goods and services to compensate for the higher cost of employment. However, if the elasticity of demand does not allow, employers would have to bear part of the costs. Consequently, they have to lay off some workers to avoid the increase in production costs. Similarly, there is an inverse relationship between labor demand and the price of labor (wages). Therefore, raising the minimum wage results in a reduction in labor demand hence …show more content…
A monopsony refers to where there is only one demander and many supplier of goods. In this case, it is the supply and demand for labor. A monopsony pay a low wage because he is the only demander. Increasing the minimum wage only extracts rents from the demander and increases supply of labor thus increasing employment. A minimum wage makes the employer a price taker and hence he behaves competitively thus increasing employment. This model perfectly fits the US economy because there are few employers and very many employees and potential employees. Brown, Girloy, & Kohen also argue that if employers are not productive they will experience shock effects of increase in operating costs with a minimum wage. This will force them to improve their productivity in order manage their operational costs. Therefore, the negative impact of minimum wage is mitigated.
In conclusion, minimum wage legislation has both negative and positive consequences on the economy. The demand-supply framework shows that minimum wage legislation results in unemployment. However, it should be appreciated that raising minimum wage increases aggregate demand hence boosting economic activities. In case of a monopsony, it will result in increase in labor demand. In addition, firm productivity may increase due to employee motivation and