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The Park Place Economist

Abstract

The minimum wage rate has been highly controversial and heavily debated especially in recent years and the most recent election cycle. At its core, the minimum wage has the power to increase major components of an economy, including national GDP, price levels, output, and overall standards of living. It also protects workers and employees from predatory and exploitative firms that will try and hire labor at an extremely low cost to them. According to the Economist (2013), the United States has a low minimum wage rate compared to other developed countries. However, increasing the rate would force businesses and firms to cut cost elsewhere to maintain a positive profit level. A common way for businesses to cut cost from an increase in wage rate is to cut the number of employees they hire. This is obviously problematic as the minimum wage law was designed to protect workers, not to cause an increase in unemployment. An increase in unemployment can have a number of magnifying effects on an economy such as a reduction in output, consumption, and overall GDP as well as an increase in government spending from unemployment benefits. We can analyze the effects on employment from an increase in minimum wage through a supply and demand for labor graph. Graphed above is the supply of labor from the consumer’s perspective, which is how much labor the work force will provide at any given wage rate. The demand for labor is from the producer’s perspective, which is how many workers any given firm will employ at a given wage rate. In a competitive market the market forces would create a competitive wage, which would equate to a full level of employment. However, a minimum wage would increase the cost to companies, reducing their desire for labor. The minimum wage increase would cause an increase supply in labor, leaving excess workers without a job and thus increasing unemployment.

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