LABOR ECONOMICS 6
Theminimum wage follows a set of laws that prevent employers from payingwages below a mandated level. Since 1938, the federal government ofthe United States has imposed a minimum wage through the departmentof labor. According to the government, the minimum wage aims athelping low-skilled workers however, decades of economic researchhave concluded that it affects the broader economy including theemployees. Specifically, it disrupts the employment opportunities forlow-skilled laborers, including the youth, minorities, and those withspecial needs (Wilson, 2012).
Thesisstatement:The minimum wage directs the least remuneration an employee should begiven in a certain market hence, it leads to an increase in theproduction cost. The main effect of the policy is decreasing workopportunities as the entrepreneurs get rid of unskilled employees andteenagers in the hiring process.
Predictionsby Economic Theory
Accordingto the standard theory of competitive labor markets, an increase inthe minimum wage level causes a decrease in the employmentopportunities for low-skilled employees. A ‘mandatory’ minimumwage set higher than the competitive equilibrium wage level reducesjobs in two ways. First, it increases the cost of low skilled laborand forces the employers to substitute towards other inputs such ascapital or equipment. Second, a higher minimum wage, and the need tosubstitute for other inputs as well as capital translate to a higherprice, which, in turn, translates to increased costs of conductingbusiness. Therefore, the amplified costs reduce the demand for laborand increase the consumer prices for goods and services (Pettinger,2014).
ASupply and Demand Graph Illustrating the Effect of a Minimum Wage
Wages D S
A B C
Em Ec Ec1 Employment
Theabove graph demonstrates the competitive model, which is mostly usedfor evaluating the minimum wage. The figure depicts a negativelysloping labor demand curve as well as an equilibrium wage rate thatis free of control from individual agents. Imposition of a minimumwage serves as government distortions that result in negative sideeffects at the market place (Neumark, 2015).
Inthe graph, the market demand curve for labor is DD, and the supplycurve is SS. The competitive wage rate occurs at the intersection ofthe two curves. An increase in the minimum wage from Wc to Wm reducesemployment from Ec to Em. The reduction in employment (from Ec-Em) islesser than the growth in the supply of labor (from Ec-Ec1) (Neumark,2015).
Trueand False Elasticity Conditions According to Economic Theory
Economictheories associate the labor market with various complications. Itidentifies that workers have varying skill levels that causedifferent levels of elasticities in the job market. First, in acompetitive model, the labor market is perfectly elastic since anincrease in the minimum wage forces employers to reduce their demandfor low-skilled employees in the form of ‘labor to labor’substitution. Earlier studies on the employment effects of minimumwages found that there are elasticities of between -0.1 and -0.3 forteenagers aged between 16-19years. Besides, the studies revealelasticities of between -0.1 and -0.2 for younger adults aged between16-24 years. N elasticity of -.01 implies that an increase in wagesby 10% reduces the teenagers employment by 1%. The studies usedresearch from the increasing number of states increasing theirminimum wages above the federal rates. The studies compared theresults of changes in youth employment rates between states that didand did not raise their minimum wage levels (Pettinger, 2014).
Economistsobserve that the change may not show up in the form of job losses.Instead, they observe the need to pay focus to low skilled employeeswhose wages is directly pushed upwards by the minimum wage.Therefore, the theories observe that policies should focus on theeffect of a minimum wage in reducing the jobs for low-skilledemployees since they are the ones intended to get help from theminimum wage (Pettinger, 2014).
Accordingto Pettinger (2014), elasticity is affected by worker mobility. Inthe monopsony model, employee mobility is limited therefore,employers have the discretion in setting the workers’remunerations. In such instances, the effect of increasing the incomerate becomes ambiguous. Economists observe that such models are lessapplicable to labor markets for unskilled workers that are mostlyaffected by the minimum pay. Instead, the economists note thatmonopsony markets have many similar employers in proximity to oneanother such as in the case of shopping malls. The markets also havehigh staff turnover rates (Pettinger, 2014).
Lowwages belong to entry-level workers. Decades of research observe thatthe low skilled workers do not earn such wages for an extendedperiod. Nearly two-thirds of minimum wage employees move above theminimum wage after one year of service. Minimum wage enables thelow-skilled workers to develop skills and establish a track recordnecessary for advancing to better-paying jobs. Increasing the minimumwage causes a collateral damage by reducing the number of entry-leveljobs. The decision to raise the minimum wage comes with additionalcosts in the form of job losses and higher prices of goods as well asservices. Most researchers have revealed that raises in the minimumwage reduce employment of teenagers and other low skilled employees.
Variousexceptional findings, nevertheless, reveal no employment effects fromraising the minimum wage. The studies use specific versions ofestimation approaches with close geographic controls that end upobscuring job losses. The most recent research applies variousmethods to address the problem associated with comparing differentstates. The studies confirm earlier discoveries that associatedincreases in minimum wages to job loss. The overall body of evidenceconcludes that a higher minimum wage results in some level ofunemployment for the least skilled workers.
Neumark,D. (2015, December 21). The effects of minimum wages on employment.EconomicResearch.Retrieved fromhttp://www.frbsf.org/economic-research/publications/economic-letter/2015/december/effects-of-minimum-wage-on-employment/
Pettinger,T. (2014, September 19). Effect of minimum wage on AD/AS. EconomicsHelp.Retrieved on 28 December, 2016 fromhttp://www.economicshelp.org/blog/11503/labour-markets/effect-of-minimum-wage-on-adas/
Wilson,M. (2012, September 1). The negative effects of minimum wage laws.Downsizingthe Federal Government.Retrieved on 28 December, 2016 fromhttps://www.downsizinggovernment.org/labor/negative-effects-minimum-wage-laws