Introduction
Raised minimum salary policies have featured in several countries such as the United States implementing the lowest wages that each firm should pay per hour. In situations where firms impose the minimum income, firms should not below the amount enacted by government on workers. For instance, two largest cities such as California and New York have enacted low minimum wage of $15 per hour and firms are expected to comply with such laws (Cengiz et al., 2019). There has been an existing debate with opponents arguing that minimum wage has adverse impacts on low wage workers depending on responsiveness of firms to changes in wages.
Economic theory
The neoclassical economic theory predicts that impacts of rising minimum wage depend on how firm responds to such changes. In such circumstances, a firm will choose to respond to increased minimum wage by either cutting the number of employees because minimum wage raises the level of expenses on labor. This approach will result in a decline in the number of low skilled workers whose level of payment has increased thus creating unemployment on the low wage workers. In circumstances where government enacts laws regarding the level of minimum wage in a country, expenditures by firms on production process increases. As a result, it will become challenging for the firm to accommodate the high number of workers. In an attempt of cutting these expenses, the firm will take advantage of employing skilled and qualified workers above set minimum wage to increase efficiency in firm’s operation (David et al., 2016). Majority of the unemployed people in the city will be those who do not have the required skills thus increasing unemployment.
Delegate your assignment to our experts and they will do the rest.
Rising minimum wage has a significant impact on unskilled workers with salaries above existing minimum wage but below new set wage. Minimum income targets small wage and unskilled employees in a city and the government enacts such a policy intending to improve their welfare. The effects depend on whether there is perfect competition in the labor market. In this case, employers are the determinants of the prices they ought to offer workers while employees become price takers in labor market. Minimum affects those people who were initially paid fees that are slightly above existing minimum wage but below raised minimum wage. In such occasions, employees will be sensitive to price changes, and there might be a shift of the labor demand curve to the left thus reducing the number of workers needed in an organization (Meer & West, 2016). Since higher prices are attractive o employees, more people both skilled and unskilled workers will be willing to work at the current labor prices. As a result, the labor market will be flooded with both skilled and unskilled labor force thus creating an opportunity for the firm to maximize efficiency by hiring qualified and efficiency employees. The effect of this price change is that there will be a decline in the number of low paid workers in the firm.
High minimum salaries indicate that there will be an increased level of prices of products from affected companies in the market. This impact occurs because of the perception that a high minimum wage has the effect of rising operational costs and the firm can react by cutting the number of workers to reduce the operational costs. In such occasions, there will be the application of the law of demand indicating that demand increases with decrease in prices, and it becomes high when rates are low. This law affects low wage workers who are less trained because of the labor substitution effect employed by many companies. For instance, a firm may decide to purchase machines and hire a few skilled workers to operate the production tools thus creating a large pool of unemployed workers in the labor market. Despite this suggested impacts, there might be a positive influence of minimum wages of low wage workers in the long run because they may decide to go back to school and improve their production capabilities (Meer & West, 2016). However, there will remain high unemployment in the overall labor market because firms may not have the ability to absorb the labor supply in the market. The gap between labor supply and demand indicates the number of workers who are likely to remain unemployed in the city. The diagram below illustrates labor market with a minimum wage
Explanation
In circumstances where government implements a particular minimum wage, firms should pay above the stated value. The graph above assumes real minimum salary was $4, and the government implements a policy that increases to $5. In this case, labor supply increases to 50,000 hours while labor demand remains 32,000 hours. Under such circumstances, there will be an excess supply of workers by 18,000 hours. The right vertical column shows the rate of supply and demand of unskilled labor. This graph shows that low skilled labor supply is higher than the market thus proving the adverse effects associated with a minimum wage of low wage workers. For instance, assume that unskilled workers affected by a minimum wage of labor supply of 1000 shown by the point where $5 minimum wage cuts the supply curve. Additionally, the firms demand only 800 hours of unskilled labor where demand curve cuts $5 minimum wage. This information indicates that 200 hours of unskilled labor remain unoccupied.
The analysis and illustration of impacts of minimum wage seeks to explain elasticity of labor demand and supply as a result of changes in labor price changes. In this case, there will be an evaluation of the responsiveness of firms in demand for labor as a result of rising minimum wage by government (David et al., 2016). Effect of minimum wage reflects through sensitivity of firms to changes in prices they should pay workers for offering services to an organization. In circumstances where there is a high elasticity of demand, there is likelihood that there will be a high reduction of several employees due to a price increase. There will also be testing of the elasticity of labor supply concerning wage changes in an organization. This elasticity measures the responsiveness of workers to changes in prices in the labor market. The flexibility of labor supply shows the willingness of workers to offer employment at the real wage in the market.
Conclusion
Raised minimum salary causes adverse effects of the low skilled workers receiving low wages in an organization. In circumstances where government implements a policy supporting minimum wage, firms react by cutting the number of lowly paid workers and replacing such people with skilled employees. Most of the lowly paid employees are unskilled, and they are mostly affected by the increase in minimum wages thus compelling firms to replace unskilled labor force with skilled workers. However, the effects rely on the elasticity of labor demand and supply in the market. These elasticities measure the responsiveness of workers and firms in circumstances where there are changes in wages.
References
Cengiz, D., Dube, A., Lindner, A., & Zipperer, B. (2019). The effect of minimum wages on low-wage jobs: Evidence from the United States using a bunching estimator (No. w25434). National Bureau of Economic Research.
David, H., Manning, A., & Smith, C. L. (2016). The contribution of the minimum wage to US wage inequality over three decades: a reassessment. American Economic Journal: Applied Economics, 8(1), 58-99.
Meer, J., & West, J. (2016). Effects of the minimum wage on employment dynamics. Journal of Human Resources, 51(2), 500-522.
