The minimum wage has a direct impact on the cost of labor used by employers. Raising the minimum wage is similar to increasing the prices of commodities, which leads to declining demand. In this regard, a higher minimum wage would raise the cost of labor and discourage employers from recruiting people; this results in unemployment. Due to the effects of wages on employment, the government included the minimum wages rates into the Fair Labor Act of 1938 (Berlatsky 95). During the passing of the law, economists speculated that minimum wages would influence economic growth, eliminate wage inequality, create jobs, and fight poverty. However, the real effects of high minimum wages include the increased cost of labor and unemployment. Since the conclusions were made based assumptions on labor supply and demand and the market structures, cases may arise when raising the minimum wages would not increase the unemployment (Dolar, 160). Therefore, controversy occurs where some economists link higher minimum wages to unemployment while others think that is not always the case.
Employment Effects of Raising the Minimum Wage
i. Perfectly competitive market
The wages employers pay in a perfectly competitive market is determined by the forces of labor demand and supply. When the labor demand is high, firms may pay higher wages to attract bets talents for higher productivity and profits (Dolar, 162). Conversely, when labor supply is high, employers may exploit the opportunity to offer lower salaries than the job deserves. However, when a minimum wage is introduced to a perfectly competitive market, all employers have a wage floor, which they should not pay below. The effects of such changes also vary with the elasticities of supply and demand.
In an elastic labor supply and demand, a small change in wages causes a massive change in demand and supply as shown in the Graph 1 below. In this market, raising the minimum wage has a lower impact on the workers' compensation but a broader increase in unemployment. Besides, the payment under minimum wage (pink area) is less than that under equilibrium wage rate (blue area), as illustrated in the Graph 1 below.
Graph 1: Minimum wage on elastic labor demand and supply
In an inelastic labor supply and demand, a higher change in the wage rate causes a smaller change in labor demand and supply. As illustrated in the Graph 2 below, imposing a minimum wage in an inelastic market causes a slight change in unemployment while the worker's compensation (pink area) is higher than that of equilibrium wage rates (blue area). Therefore, raising the minimum wage in inelastic labor demand and supply creates more economic benefits of higher salaries than the challenges from unemployment.
Graph 2: Minimum wage on inelastic labor demand and supply
ii. Monopsonist market
Monopsonist is whereby the market has one buyer and several sellers. Unlike monopoly where one seller controls the market, a Monopsonist is a buyer with total control over all the sellers. Since the Monopsonist faces the same supply of labor as that of the entire market supply, the equilibrium wage rate is not set by forces of labor demand and supply. The monopoly that a monopsonist has in setting the wage rates focuses on the marginal factor cost (MFC) versus the marginal revenue product (MRP) (Dolar, 164). In other words, the equilibrium wage rate in a monopsonistic market is set by forces of MFC and MRP and not the labor demand and supply. The Graph 3 below shows that at the level where MFC equals MRP, the monopsonist can acquire Ld units of labor. However, at Ld units of labor, the supply allows the monopsonist to pay W5 of wages, which is way below the equilibrium wage rate W8. Therefore, without the minimum wage rates in a monopsonist market, the employer pays lower wages than the services provided by the employees.
Graph 3: Minimum wage on monopsonistic market
When the minimum wage is introduced, the monopsonist is forced to raise the wage rate from W5 to W7. However, at this point, the employer has a vacancy to hire more workers Ld' since and gain more. Therefore, raising minimum wages in a monopsonistic market creates employment, but the workers may still receive lower salaries than the proportion of their services as illustrated in the Graph 3 above.
From the above analysis and graphs, it is evident that the effects of minimum wage on employment vary based in the elasticities of the labor and supply market, as well as the structure of the labor market. Minimum wages cause higher unemployment in elastic labor demand and supply in a perfectly competitive market (Dolar, 166). Conversely, minimum wages create employment in a monopsonistic market. As a result, economists face a social issue regarding the appropriate approach towards implementing minimum wage without creating unemployment.
The first step that economists should take in addressing this social issue is to widen the variables included in the prediction of the effects of minimum wages. When the labor demand and supply are the only variables used, then the results are similar to the findings discussed above (Mincer, 42). However, when other variables such as economic stimulus, government intervention, cost of social programs, and inflation are involved, then the results are different. The economic stimulus is the impact of higher wages on the employee's expenditure and investment (Kosters, 23). In this regard, economists should consider that at higher salaries, the worker will have higher purchasing power and invest in other areas or businesses that either create employment or economic growth. Therefore, the economic stimulus of minimum wages is a long-term effect but, it instead creates employment.
The inflation rate also influences the impacts of minimum wages of unemployment (Mincer, 43). Economists should consider that when the inflation rate is constant, higher wages lead to higher spending, which entails buying goods and services from employers (Cooper and Andrew, 44). In the long-run, the manufacturers are forced to hire more labor to meet the increasing demand arising from increased salaries. On the same note, economists should consider the effects of government incentives and cost of social programs. In most cases, governments set minimum wages alongside the provision of subsidies that lower the cost of production and workers' spending on social programs (Cooper and Andrew, 39). Under these variables, minimum wages would not affect the cost of labor as the employer and worker spend less in production and social programs respectively (Kosters 26). As a result, employers have the ability to higher more while workers are spending more on personal affairs, which are directly linked to increased demand for goods and services.
In conclusion, minimum wages have different effects on unemployment based on the elasticity of the labor demand and supply, as well, as the market structure. Imposing minimum wage in elastic labor demand and supply leads to higher unemployment and low change on the worker's pay. Conversely, imposing minimum wage in inelastic labor supply and demand causes low unemployment with a higher increase in the worker's compensation. However, in a monopsonistic market, minimum wage leads to employment while the workers may still be receiving low wages compared to their services. The arising social issues can be explored through the inclusion of other variables such as inflation stability, government creating jobs, subsidies or social programs expenses, and the economic stimulus. These additional factors result in the creation of employment when the minimum wage is increased.
Works Cited
Berlatsky, Noah. The Minimum Wage. 2nd ed. Detroit: Greenhaven Press, 2012. Print.
Kosters, Marvin H. The Effects of the Minimum Wage on Employment. Washington, D.C: AEI Press, 2016. Print.
Mincer, Jacob. Unemployment Effects of Minimum Wages. Washington: U.S. Dept. of Labor, Office of the Assistant Secretary for Policy, Evaluation " Research, 2016. Print.
Dolar, Veronika. "The treatment of minimum wage in undergraduate economics textbooks revisited." International Journal of Pluralism and Economics Education 4.2 (2013): 157-182.
Cooper, Russell, and Andrew John. Microeconomics: Theory through Applications. Flat World Knowledge, 2013.
