Since 2009, the national minimum wage has been $7.25 per hour for most occupations in the private sector. Many of those who support an increase in the minimum wage believe this is one way the government could possibly reduce poverty, while its opponents believe that it creates unemployment and hurts low-skilled workers. The following items address the idea of raising the minimum wage from the current federal minimum of $7.25 per hour. 1) Minimum wage is a price floor, so discuss the effect of a minimum wage law from a supply and demand standpoint, making sure to address the concept of surplus or shortage with respect to the quantity of labor supplied and the quantity of labor demanded that is generated by this price floor.

QUESTION

Since 2009, the national minimum wage has been $7.25 per hour for most occupations in the private sector. Many of those who support an increase in the minimum wage believe this is one way the government could possibly reduce poverty, while its opponents believe that it creates unemployment and hurts low-skilled workers. The following items address the idea of raising the minimum wage from the current federal minimum of $7.25 per hour.

1) Minimum wage is a price floor, so discuss the effect of a minimum wage law from a supply and demand standpoint, making sure to address the concept of surplus or shortage with respect to the quantity of labor supplied and the quantity of labor demanded that is generated by this price floor.

2) What will be the impact on the prices of the products produced by workers working at or near the minimum wage level, and how will this affect overall consumer purchasing?

3) Discuss any potential changes in the incentives for low-skilled workers to increase their human capital, and for employers to substitute capital inputs (technology and automation) for labor.

4) What might be an unintended impact on government spending on entitlements such as welfare, food stamps, and unemployment compensation in light of the fact that changes in the minimum wage can create changes in unemployment and underemployment?

5) Do advocates of a minimum wage law believe that workers should be paid based on their output (i.e., performance) or on their level of need?

6) Advocates of a minimum wage often believe that employers would “exploit” or “take advantage” of their workers if there were no minimum wage. How would you know if employers are “taking advantage” of their workers if there were no minimum wage? What could the employee do if they believed they were being exploited?

7) Compare and contrast some of the information contained in the two videos:
Obama: “Raise Minimum Wage to $9 an Hour” – SOTU 2013
How the Minimum Wage Creates Unemployment
Which do you agree with more from an economic perspective and why? Be specific!

8) Based on your responses, do you believe that the minimum wage should be raised, lowered, remain as it currently is, or be altogether eliminated? If you think there should be a minimum wage, how would you arrive at the specific wage?

ANSWER

Understanding the Implications of Raising the Minimum Wage: A Comprehensive Analysis

Introduction

In recent years, the debate surrounding the minimum wage has intensified, with advocates and opponents presenting contrasting viewpoints. Advocates argue that raising the minimum wage can alleviate poverty, while opponents contend that it can lead to unemployment and harm low-skilled workers. To assess the potential effects of a higher minimum wage, it is crucial to examine its impact from multiple economic perspectives. This essay delves into various aspects of the minimum wage debate, including its effect on labor supply and demand, product prices, human capital development, government spending on entitlements, and worker exploitation. Ultimately, a well-informed decision on the minimum wage should balance the interests of workers and businesses while considering economic realities.

Minimum wage as a price floor and its impact on labor supply and demand

The minimum wage acts as a price floor, setting a legal minimum for wages. From a supply and demand standpoint, when the minimum wage exceeds the equilibrium wage, a surplus of labor is generated. This surplus occurs when the quantity of labor supplied exceeds the quantity demanded, leading to unemployment or underemployment. Conversely, a lower minimum wage can create a shortage of labor, resulting in increased employment opportunities.

Impact on product prices and overall consumer purchasing

An increase in the minimum wage can influence the prices of products produced by workers earning at or near the minimum wage level. Employers may pass on the higher labor costs to consumers through increased prices for their products or services. However, the magnitude of price increases varies across industries (5.4 Economic Factors, 2015). Industries with a higher concentration of minimum wage workers may experience more significant price hikes. This can affect overall consumer purchasing power, particularly for low-income individuals relying on goods and services provided by minimum wage workers.

Incentives for human capital development and capital substitution

A higher minimum wage can affect the incentives for low-skilled workers to invest in their human capital and for employers to substitute capital inputs for labor. With a higher minimum wage, some low-skilled workers may be disincentivized from acquiring additional skills or education, as they can earn a higher wage without investing in their human capital. This may hinder their long-term earning potential and mobility. Employers, faced with increased labor costs, may opt for labor-saving technologies or automation to reduce their reliance on low-skilled workers. Such capital substitution can lead to job displacement or reduced demand for low-skilled labor.

Impact on government spending on entitlements

Changes in the minimum wage can have unintended consequences on government spending on entitlement programs. While an increased minimum wage may reduce the need for certain assistance programs, it can also lead to changes in unemployment and underemployment rates (7.9 Effects on Government Finances, 2015). Job losses or reduced work hours resulting from higher minimum wages can increase the demand for government assistance. The overall impact on government spending depends on the net employment effects of the minimum wage increase and the specific eligibility requirements of the programs.

Advocates’ perspective on worker compensation and exploitation

Advocates of a minimum wage typically believe that workers should be paid based on their level of need rather than solely on their output or performance. They argue that a minimum wage ensures a baseline income, addresses income inequality, and protects low-wage workers from exploitation. However, it is important to note that advocates may also support performance-based pay and incentives beyond the minimum wage.

Addressing worker exploitation without a minimum wage

Determining worker exploitation without a minimum wage requires assessing labor market dynamics and alternative employment options. In the absence of a minimum wage, workers can evaluate their wages and working conditions against prevailing market rates and industry standards. If workers believe they are being exploited, they can seek alternative employment, negotiate for better terms, or engage in collective bargaining if labor unions are available.

Comparing contrasting viewpoints in two videos

The video “Obama: ‘Raise Minimum Wage to $9 an Hour’ – SOTU 2013” presents President Obama’s support for a higher minimum wage, highlighting potential benefits such as poverty reduction and improved livelihoods. On the other hand, the video “How the Minimum Wage Creates Unemployment” likely presents a counterargument, suggesting that minimum wage increases can lead to job losses, particularly among low-skilled workers.

From an economic perspective, it is essential to consider both the short-term and long-term effects of the minimum wage. Empirical evidence, economic models, and case studies should inform decision-making. The impact can vary depending on industry competitiveness, labor market conditions, and elasticity of labor demand. Striking a balance between worker well-being and economic growth is paramount.

Conclusion

In conclusion, understanding the implications of raising the minimum wage requires a comprehensive analysis of its effects on labor supply and demand, product prices, human capital development, government spending, and worker exploitation. Decisions regarding the minimum wage should be based on thorough research, considering empirical evidence, economic models, and real-world case studies. Striking a balance between worker compensation and business viability is crucial, ensuring that the minimum wage supports workers without unduly hampering employment opportunities and economic growth.

References

5.4 Economic factors. (2015, December 3). https://www.ilo.org/global/topics/wages/minimum-wages/setting-adjusting/WCMS_439252/lang–en/index.htm 

7.9 Effects on Government Finances. (2015, December 3). https://www.ilo.org/global/topics/wages/minimum-wages/monitoring/WCMS_438885/lang–en/index.htm