A minimum wage is the lowest pay per hour than an employer can legally pay their workers. The minimum wage per hour depends on the type of job being done and the state where the job is being done. The United States enacted a minimum wage in 1938 in line with Labor Standards Act (Berlatsky 95). It is the role of the US labor law as well as some states and local law to set the minimum wage in the US. The current minimum wage in the US per hour is $7.25. Nevertheless, some states have a minimum wage that is above the minimum wage set by the federal. This has struck controversy with some economist citing increased minimum wages as the cause of increased unemployment in the United States.
A qualitative analysis of the effect of increasing minimum wage indicates that it leads to reduced level of employment. Increasing minimum wage makes labor expensive for firms hence their need to use few hours. At the same time, increasing wages call for many people who are in need of the job. Therefore, increase in labor supply and the decrease in the labor demand leads to increased unemployment (Kosters 23). Assuming that minimum wage is raised from $5 to $6, the graphs below show the translated effect on employment and unemployment.
Quantitative analysis of the effects of increasing minimum wage explains when we expect big or small changes in employment or unemployment. This aspect is dependent on wage elasticity of labor demand and labor supply. Wage elasticity of labor demand alone shows the impact of varying minimum wage on the level of employment. If the demand curve is relatively elastic, there will be a big change in employment (Mincer 42). Elastic demand curve means that the firm response due to a small change in wage is by laying down many workers hence employment change will be large. Conversely, if the demand curve is somehow inelastic, the variation in the employment level will be small. This is illustrated in the graphs below.
The effect of increasing minimum wage on unemployment is explained by both wage elasticity on labor demand and price elasticity of supply. A worker is termed unemployed if they are looking for a job and are currently unemployed (Mincer 42). The labor supply curve indicates the number of workers who are willing to work at a given wage. Therefore, to understand the impact of minimum wage on unemployment, we must compare the supply of labor with the demand for labor. The more elastic the labor curve, the more the change in the labor supplies hence a bigger change in unemployment. If both supply and demand are both inelastic, increase in the minimum wage will not lead to increase job seeker or even decreased available jobs hence it will have a small effect on unemployment. Conversely, if both demand and supply curves are elastic, an increase in minimum wage will lead to an increase in a number of job seekers and a decrease in jobs available hence increased unemployment. This effect is illustrated in the graphs below.
Monopsony is a type of labor market where only one firm demand labor. This single firm demanding the labor is known as monopsonist (Mincer 42). Normally, the imposition of minimum wage beyond the equilibrium wage in competitive markets results in reduced employment. On the contrary, the imposition of a minimum wage above the equilibrium wage in monopsony market is likely to increase employment as well as boost wages. This is explained by the graph below.
A monopsony employer faces a supply curve S, a marginal revenue product curve (MRP) and a marginal factor cost curve (MFC) (Mincer 42). Let’s assume that the government imposes a minimum wage of $5. At this wage, L1 units of labor are supplied. To acquire lesser units of labor the firm must also pay the minimum wage. Therefore the section of the supply curve below the minimum wage of $5 is irrelevant and dotted. If the firm wants to hire more units of labor than L1, they must pay a higher minimum wage as shown by the curve.
The effect of minimum wage cannot be fully explained by just considering the changes in the changes in labor supply and demand or even in the structure of the labor markets. At times, increase in minimum wage does not lead to changes in employment as explained above. Other factors may come in to affect the outcome and therefore the explanation given above cannot solely explain the phenomenon (Mincer 43). Economist, therefore, needs more than observation to fully understand the real outcome.
Many things may be happening in the labor at the same time and may contribute to differences in findings among economists. At the same time wage is changing the company may be changing other changes such as a change in costs of other inputs, change in the competitive environment, change in the technology and change in demand of the products (Kosters 23). All these changes may lead to the shift of labor demand curve. For instance, the minimum wage may increase over time but due to increase in product demand, the labor demand may also increase concurrently. In such a case, it is right to conclude that minimum wage has little or no effect on labor demand.
In analyzing data, economists try to distinguish the effects of their target factor from those caused by other variables. To obtain accurate empirical work, one must obtain informative sources of variation and disregard the irrelevant sources of variation (Kosters 26). For instance, in determining the effects of minimum wage, one can get the minimum wage at different places, like in different states in the United States or at different times.
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.
