Question

What are the key implications of an increased wage in the theoretical model? How might the actual impact of the increased wage differ from theoretical model predictions? How might the effects of an increase in minimum wage to $12 differ from those of an increase to $15?

Answer 1

Answer

With the information provided above, we can provide the following interpretations.

Increased wage

when the wage rate increases in the market, the individuals have two choices (1) to increase the level of labour supply to get higher wages and earn more income. (2) to keep the consumption constant with increased income and increase leisure time.

But individuals have a high opportunity cost of giving up one leisure with an increased wage rate so they usually don't shift to increase the leisure. Similarly, with an increase in wage rate, more individuals try to get employed. so the labour supply increases in the market.

The theoretical model differs from actual impact as more people try to get employed and the market may fail to provide employment to everyone. So, it may lead to people shifting to the informal sector to have work. Similarly, with increased wage rate, the firms' labour demand decreases.

Minimum wage is floor wage which is always set above the equilibrium wage rate. So, if the minimum wage $12 and $15 are above the equilibrium wage rate then firms' labour demand will decrease in the competitive market. This leads to labour displacement from the formal sector to the informal sector. So minimum wages lead to increased wages and unemployment.

Suppose, the equilibrium price is $13. In the case of $12 minimum wages, the minimum wage will not have any impact on wages and employment as a market will clear at the equilibrium wage rate. But $15 will have an impact on wages and employment.