Impact of Minimum Wages

IMPACT OF MINIMUM WAGES 4

Impactof Minimum Wages

Federalminimum wage increasesunemploymentand should be eliminated

AMinimum wage is aprice floor set in terms of wage rate in a bid by the government togive the lowest paid workers an income floor of earning a decentincome. While minimum wages are set to protect workers, they end uphurting them because the wage rate floors lead to unemployment. Theunemployment is caused by the increase in the cost of production asmanufactures will be paying more for labor. As a result of the highcost of labor, employers will seek to pay less, by employing less.This is because the wage rate is increased, and increases the cost ofhiring an employee, as shown in the graph below.

Wagerate

W SL

WMIN

We

SL

W

0 Q1 Qe Q2 Labor

Thenormal equilibrium wage rate of We, is set up by the forces of demandand supply. The two forces also determined at quantity of laborsupplied at Qe which is a wage that can comfortably be cleared fromthe labor market. The imposition of a minimum rate, for instance, setat WMINleads to excess supply of labor because workers will be willing towork at the high pay, represented by Q2– Q1.This will reflect the unemployment in the market, which makes minimumwages inappropriate interventions.

Atthe same time, settinga minimum wage by the federal government increases the cost of laborfor the producers in the economy, compared cost of technology andcapital (Mankiw,2014).As a result, employers will shift to capital-intensive production andavoid labor-intensive production. This creates a scenario where humanlabor is rapidly replaced by machines, equipment and automatedsystems. This leads to loss of jobs, a situation that increasesunemployment in the economy as the formerly employed the unemployedside. Therefore, federal minimum wage should be eliminated.

Reference

Mankiw,N. (2014). Principlesof Economics.Stamford: Cengage Learning