StudentShare
Contact Us
Sign In / Sign Up for FREE
Search
Go to advanced search...
Free

Economic Effects of Minimum Wage Fixation - Essay Example

Cite this document
Summary
This essay aims to distinguish the correlation between minimum wage and employment rates, from the causal effect of minimum wage on employment. Assumptions of three different theoretic models of labor are analized to discover the economic effects of minimum wage fixation…
Download full paper File format: .doc, available for editing
GRAB THE BEST PAPER91% of users find it useful
Economic Effects of Minimum Wage Fixation
Read Text Preview

Extract of sample "Economic Effects of Minimum Wage Fixation"

Labor economics The concept of minimum wage fixation has had double impacts on employment and the economy at large. While the main idea behind fixing minimum wage that workers should be paid is to make the lives of the workers better, through affording them a substantial income, it may affect the same workers, especially those with low skills negatively (Ehrenberg and Smith, 47). According to the standard competitive model of labor, fixing a minimum wage has the impact of increasing unemployment, through he creation of involuntary unemployment, where individuals can continuously apply concerted efforts o seek for a job but find none. This is because, setting the wage payable to a certain minimum level has the effect of increasing the operational costs of the firms operating in a competitive market, through the increment of operational expenses in terms of wages and salaries (Ehrenberg and Smith, 159). This can force firms to adapt to this change through reducing the number of employees or even raising the qualification standards for individuals to be recruited for such job positions, since they cannot compensate the lack of skills with wage reduction. The implication of this is that; those individuals who have low skills will not get employment opportunities, since the firms will have reduced their employee threshold, or increased the requisite qualifications (Ehrenberg and Smith, 78). Additionally, according to the standard competitive model of labor, the fixation of minimum wage levels in a competitive market has the effect of shifting employment from the sectors affected by the minimum wage fixation, to the others which are not affected, such as the black markets. However, the case is different according to the Monopsony model of labor, which holds that the fixation of minimum wages has the effect of increasing employment, most especially when the wage is being increased from levels lower than the competitive wage, to reach the competitive wage levels (Ehrenberg and Smith, 112). This is because, the increment in wages to the competitive wage level will have the effect of lowering labor turnover for the few firms that are operating in the market, thus increasing productivity, boosting the employment opportunities, while also reducing the price levels for commodities (Ehrenberg and Smith, 203). On the other hand, the efficiency wage model of labor observes that increasing the wages for the workers will motivate them to work even harder, while increasing their fear of losing their jobs which are well paying (Ehrenberg and Smith, 94). This boosts the morale of the workers and make them highly motivated while undertaking their duties, an aspect that increases their productivity, and by extension, the productivity of the firm and the whole industry. This way, more employment is created, since improved productivity comes with increased opportunities (Ehrenberg and Smith, 378). Thus, according to the efficiency wage model, fixing the minimum wage, to a level higher than the competitive wage level, will promote productivity and discourage labor turnover, thus increase employment. Therefore, assuming the employment will continue rising as it has happened since June 2009, the empirical researchers need to face the following issues, to distinguish the correlation between minimum wage and employment rates, from the causal effect of minimum wage on employment. First, the empirical researchers should understand the issue of market operations, whereby different types of markets will give different results, when it comes to the relationship between minimum wage and employment. For example, an open competitive market will give different results, compared to a monopsony market, when it comes to the correlation between minimum wage and employment (Ehrenberg and Smith, 112). Secondly, the researchers need to understand the nature of the movement of the wages and the maximum level attainable in minimum wage fixation, before the correlation between the minimum wage and the employment changes from positive to negative. The correlation existing when there is an upward move from a wage level that is below competitive level to match the competitive level, is different from the correlation obtainable when the shift is from the competitive wage level to a much higher level. Thirdly, the researchers need to understand that minimum wage fixation affects the lower spectrum of the workers who earn low wages and are not well trained, as opposed to the well trained, experienced and handsomely compensated ones (Ehrenberg and Smith, 476). While the causal effect of minimum wage on employment is increased unemployment rates, the correlation differs, depending on these issues. The evidence studied suggests that the increases in minimum wages will cause a reduction of employment rate in California, while increasing the employment in San Jose. This is because, the fixation of minimum wage will set the wage level higher than the current minimum wage level in California, prompting the firms and businesses to adapt measures that will protect their profit levels, such as layoffs, reduced worker benefits or reduced worker training (Ehrenberg and Smith, 59). This is contrary to the causal effect in San Jose, where employment will be created, as a result or reduced minimum wage level from the one to be effected in March, which reduces firms’ expenses and thus increases their profitability. This enhances employment creation by the firms. The minimum wage can only go high, up to the competitive wage level, after which it will start having negative impacts. This is because, an increase in wage level from levels lower than the competitive levels has the impact of boosting the morale of the workers and increasing their levels of motivation, thus increasing their productivity, and consequently that of the firms (Ehrenberg and Smith, 261). However, an increase in minimum wage beyond the competitive level will increase the expenses of the firms, leading to layoffs or leading to the firms quitting the industry, which will increase unemployment. Works Cited Ehrenberg, Ronald G, and Smith Robert. Modern Labor Economics: Theory and Public Policy. Upper Saddle River, N.J: Prentice Hall, 2011. Print. Read More
Cite this document
  • APA
  • MLA
  • CHICAGO
(“Economic Effects of Minimum Wage Fixation Essay”, n.d.)
Retrieved from https://studentshare.org/macro-microeconomics/1468335-economic-effects-of-minimum-wage-fixation
(Economic Effects of Minimum Wage Fixation Essay)
https://studentshare.org/macro-microeconomics/1468335-economic-effects-of-minimum-wage-fixation.
“Economic Effects of Minimum Wage Fixation Essay”, n.d. https://studentshare.org/macro-microeconomics/1468335-economic-effects-of-minimum-wage-fixation.
  • Cited: 0 times

CHECK THESE SAMPLES OF Economic Effects of Minimum Wage Fixation

Impact of Different Variables on the Economic Growth of Sweden

This paper has conducted a comprehensive research on finding out the effects of tax policies, employment and wages on the level of economic growth of Sweden.... Economic growth of a country is also related to wage level.... While some think that a path of low wage can lead to economic growth, some others feel that a high wage economy is more efficient in achieving higher growth.... Hence the level of growth of an economy is also dependent on wage policies taken by the government....
60 Pages (15000 words) Dissertation

Productivity and Cost

In a manufacturing industry, the wage and unit cost fixation is a significant strategic decision.... wage relates “In the long run there is a positive relationship between improvements in labor productivity and the real wages paid to labor as a factor of production.... wage also depends on the demand and supply of labor.... High availability of labor may cause a decrease in wage and higher demand for labor can cause increase in wage....
4 Pages (1000 words) Essay

Labor Economics: The Factors That Contribute To The Minimum Wage

This results from the increase of minimum wage in the market.... The main objective of the assignment "Labor Economics: The Factors That Contribute To The minimum wage" is to investigate the relationship between the unemployment rate and the value of the minimum wage.... Furthermore, the writer addresses the decline in the minimum wage.... With an increased minimum wage, the demand is at Q0 which is below the equilibrium labor quantity....
11 Pages (2750 words) Assignment

Does Government Intervenes in Society

Throughout the course of history, as seen in various parts of the world, Governments have increasingly tried to control Economic action through its policies, which include taxation, formation of minimum wage rates, and even using military force to conquer and rule markets – as… (Landow).... Similarly, minimum wages tend to lead to unemployment in the economy especially for unskilled labor when the wage rate is set above the... Often, government fixes prices on goods on services or labor, such as minimum and maximum prices, which may lead to aberrations in the economy....
5 Pages (1250 words) Essay

Inequality Affects World Nations

The grass-root level reasons behind inequality within the United States are cheap labor from Asia, unreasonable exchange rates, outsourcing, corporate greed, illegal immigration, discrimination, and involvement in global wars, but policy changes like increase in minimum wages, innovative tax systems, earned income tax credit (EITC), Family and Medical Leave Act of 1993 (FMLA), etc can reduce this inequality to an extent.... So, the American companies began to recruit Asians due to less economic burden....
8 Pages (2000 words) Essay

Minimum Wage in the US

This minimum wage was a rise from $6.... In spite of requests… As a result, an advanced group of experts, CEPR (Center for Economic and Policy Research), created an online ticker to show legislators and the public the amount of purchasing power that minimum The ticker is proof that a fixed minimum wage in essence adds up to a constant wage cut for millions of American employees because their incomes do not increase with the cost of living.... Although five years is a long time, it is not peculiar for the federal government to go for long periods without raising the minimum wage....
4 Pages (1000 words) Term Paper

Classical and Keynesian Theories of Unemployment Classical Theory of unemployment

The market forces being generated in the economy require that the labour supply and demand be at equilibrium. Income and employment are some of the main A lower wage rate will lead to an increase in the number of workers being employed and the vice versa.... Unemployment occurs when there is excess supply of workers in the market at a particular wage level.... Unemployment occurs when the wage level is above the equilibrium wage; hence, leading to a higher labour compared to the quantity being demanded in the market....
8 Pages (2000 words) Essay

The Relation between the USA International Relations, Immigration and the Economy

nbsp;… Many political and economic analysis states how the movement of people are more dependent on the personal and economic value of both the designated country and individual benefits.... nbsp; A conclusion would be based on evidence and statistical data from various sources upon which they would be used to formulate recommendations to be adopted by the government in ensuring a mutual benefit to nations both on the relationship and economic benefits There exists a relationship between immigrants country of origin with the political, social and political organization of a given country....
10 Pages (2500 words) Term Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.
Contact Us