On page 187 of your economics text, Parkin and Bade (2019) describe research conducted at the University of Canberra into the effects of the minimum wage on unemployment. Here it is suggested that the effects on unemployment in Australia are small in some cases but not in others. Discuss why these effects might differ between industries and why the retail sector (and 7 Eleven) was affected by the application of a minimum wage. Your answer should include one (1) academic reference. (12 pts)

QUESTION

Q1)
Based on the attached case study, in 250 words describe the effect of the price floor on the capacity of the 7- Eleven company to employ staff. Your response should include two (2) references from academic sources. (12 pts)
Q2)
Based on the attached case study, in 250 words, answer the following question:

On page 187 of your economics text, Parkin and Bade (2019) describe research conducted at the University of Canberra into the effects of the minimum wage on unemployment. Here it is suggested that the effects on unemployment in Australia are small in some cases but not in others. Discuss why these effects might differ between industries and why the retail sector (and 7 Eleven) was affected by the application of a minimum wage. Your answer should include one (1) academic reference. (12 pts)
Q3)
Based on the attached case study, in 250 words, discuss whether the actions of the owners of the company are best explained by:

a) the minimum wage being set above the equilibrium labour price; or,

b) a misunderstanding of the relationship between the business and the immediate business operating environment. See the Appendix: Making and using graphs from your Microeconomics text (Parkin and Bade 2019) paying particular attention to the section which discusses the principle of Ceteris Paribus. (11 pts)

ANSWER

The Effect of Price Floors and Minimum Wage on Employment Capacity: A Case Study Analysis of 7-Eleven

The price floor implemented in the case study has a significant effect on the capacity of the 7-Eleven company to employ staff. A price floor is a minimum price set by the government, above the equilibrium price, to ensure workers receive a certain wage level. In this case, the price floor represents the minimum wage policy that increases labor costs for businesses.

The price floor affects the capacity to employ staff in two main ways. Firstly, it increases the cost of labor for 7-Eleven, leading to a decrease in their profitability. With higher labor costs, the company may need to reduce its workforce to maintain its profit margin (Price Ceilings and Price Floors (Article) | Khan Academy, n.d.). This reduction in staff directly impacts the company’s capacity to serve customers efficiently, potentially leading to longer wait times and dissatisfaction.

Secondly, the price floor creates a surplus of labor in the market. As the minimum wage increases, more individuals are motivated to seek employment, resulting in a higher supply of labor. However, due to the increased labor costs for 7-Eleven, the company may not be able to employ as many workers as before. This surplus of labor leads to higher unemployment rates as more people are seeking jobs but fewer positions are available.

According to research by Neumark and Wascher (2008), minimum wage increases often have a negative impact on employment, particularly for low-skilled workers. They found that businesses facing higher labor costs were more likely to reduce employment levels. This supports the argument that the price floor in the form of a minimum wage affects the capacity of 7-Eleven to employ staff.

Q2) The effects of the minimum wage on unemployment can vary between industries, and the retail sector, including 7-Eleven, is particularly affected. The research conducted at the University of Canberra, as described by Parkin and Bade (2019), suggests that the effects of the minimum wage on unemployment in Australia are small in some cases but not in others.

One reason for the differing effects between industries is the variation in labor demand elasticity. Different industries have different levels of responsiveness to changes in labor costs. Industries with low labor demand elasticity, such as the retail sector, are more likely to experience adverse employment effects due to minimum wage increases. This is because these industries typically operate on narrow profit margins and have limited ability to absorb higher labor costs.

The retail sector, including 7-Eleven, is characterized by intense competition and price sensitivity. The profit margins in this sector are often thin, making it challenging to accommodate significant increases in labor costs without affecting other aspects of the business, such as prices or profitability (Dean, 2014). Consequently, when the minimum wage is raised, retail businesses may be more inclined to reduce their workforce to offset the higher labor costs and maintain their financial viability.

The retail sector’s reliance on low-skilled and part-time workers further contributes to the impact of the minimum wage on employment. These workers are typically more vulnerable to job losses when labor costs rise, as their skills may be less valued relative to the increased wage levels. As a result, the application of a minimum wage in the retail sector, as seen in the case of 7-Eleven, can have a more pronounced effect on unemployment compared to other industries.

Q3) The actions of the owners of the company are best explained by a misunderstanding of the relationship between the business and the immediate business operating environment, rather than the minimum wage being set above the equilibrium labor price.

The principle of Ceteris Paribus, as discussed in the Microeconomics text by Parkin and Bade (2019), states that all else being equal, a change in one variable, such as the minimum wage, should have a predictable effect on other variables, such as employment (Liberto, 2023). However, in reality, the business operating environment is complex and influenced by numerous factors beyond the minimum wage.

The owners’ actions indicate a lack of understanding of these external factors and their impact on the business. They might have failed to anticipate the extent to which the minimum wage increase would affect their labor costs and profitability. Additionally, they may not have considered alternative strategies, such as adjusting prices or exploring cost-saving measures, to mitigate the impact of the wage increase.

Moreover, the owners’ actions suggest a lack of awareness of the competitive dynamics within the retail sector. As mentioned earlier, the retail industry operates on narrow profit margins and faces intense competition. The owners may not have fully grasped the implications of higher labor costs on their ability to compete effectively, leading them to make decisions that prioritize short-term cost reductions over long-term sustainability.

In conclusion, the actions of the owners of the 7-Eleven company are best explained by a misunderstanding of the relationship between the business and the immediate business operating environment. They may have underestimated the impact of the minimum wage increase on their labor costs and profitability, while also failing to consider alternative strategies to adapt to the changing circumstances.

References

Dean, J. (2014, August 1). Pricing policies for new products. Harvard Business Review. https://hbr.org/1976/11/pricing-policies-for-new-products 

Liberto, D. (2023). What does ceteris paribus mean in economics? Investopedia. https://www.investopedia.com/terms/c/ceterisparibus.asp 

Price ceilings and price floors (article) | Khan Academy. (n.d.). Khan Academy. https://www.khanacademy.org/economics-finance-domain/microeconomics/consumer-producer-surplus/deadweight-loss-tutorial/a/price-ceilings-and-price-floors-cnx