Minimum wage has been around in the United States since 1938 and was established through the Fair Labor Standards Act. It was originally set to an hourly payment of 25 cents and slowly increased through inflation. Minimum wage has experienced 22 separate increases, a recent one was enacted in 2009 by President Obama. Each state is free to set their own minimum wage with the restriction of not going under the set federal minimum wage. California holds the highest minimum wage in the nation and will continue to increase to $15 an hour in year 2022. The question is: how much of an impact will this have on employment and the well beings of individual workers?
Competitive markets work to meet an equilibrium wage that affects the supply and quantity of labor demanded. The wage amount defines the amount of labor that is in demand. When it comes to a free market situation for labor, the equilibrium wage allows the supply and demand for quantity of labor to be equal. Higher wages changes the equilibrium price and quantity in markets that are being created by the minimum wage workers. An increase in minimum wage will shift up the supply curve in markets, which will create movement along the demand curve and lead to a new equilibrium. The market decrease as a result from a minimum wage increase, is dependent on the firm’s output of price elasticity for demand. When the demand is inelastic, there is less employment decrease versus when demand is elastic. This shows that the increase in minimum wage has an individual effect for each market.
Elasticity has a large impact on unemployment and the increasing minimum wage. Whether the demand for labor is inelastic or elastic, an increase in minimum wage will result in an employment reduction. However, unemployment is higher when labor is elastic versus inelastic. When the market for a firm’s output is not competitive, the demand for labor is determined by both the marginal product of labor and the amount of reduction in price when it comes to selling more output.
From a policy perspective, the fact that an increase in minimum wage leads to a reduced exployment does not mean that an increase is totally a bad idea, it just means there is a tradeoff of pros and cons. This includes a benefit for those who have an income increase and a loss for those who no longer have jobs.
https://www.thoughtco.com/increased-minimum-wage-impact-4019618
https://saylordotorg.github.io/text_microeconomics-theory-through-applications/s14-02-the-effects-of-a-minimum-wage.html
https://www.thoughtco.com/increased-minimum-wage-impact-4019618
https://saylordotorg.github.io/text_microeconomics-theory-through-applications/s14-02-the-effects-of-a-minimum-wage.html
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