Question

d 5 Why would raising the minimum wage to $15/hour be good 3 or bad for the macro economy in the short run? Explain. Note: To earn full credit for this graded discussion, post at least two times. First, post your own thoughts. This post should be substantial (containing at least 200-250 words). Next, respond to another student. Be polite, professional, and thoughtful. These posts should contain at least 100-150 words. All posts need to be in your own words. Any use of outside resources requires that you cite and reference your sources in APA format.

Answer 1

A minimum wage is the statutory minimum wage that employers can pay per hour. In the US, the federal min wage is $7.25 in most states. Though there is a proposal to raise it nationwide to $15 by 2024.

Bad Effects

Higher minimum wage can result in inflation due to:

High Cost of Firms.

High minimum wage will increase cost of production of firms. The employers will have to increase the wages of workers to the level of minimum wage. As a result the cost of production will increase. This increased cost will be passed on to the consumers in the form of increased prices of goods. High cost for firms will result in wage pull inflation.

High Spending by Workers.

High wages will increase the spending by workers. This can result in demand pull inflation. Demand-pull inflation is asserted to arise when aggregate demand in an economy outpaces aggregate supply.

In this case, a minimum wage could lead to firms passing wage rises onto the consumers in the form of higher prices. This will cause SRAS to shift to the left and higher inflation. The price level increaes from P to P1 and Equilibrium Quantity has fallen to Q1.

Effect on Employment

Rise in minimum wages will result in Unemployment. When minimum wages are set above the equilibrium level, then Quantity of Labour Supplied excceds the Quantity of Labour Demanded. This is because at higher wages more people will be willing to work but employers will be less willing to hire workers. As a result surplus of labour will be created resulting into Unemployment.

With the new minimum wage above the equilibrium level, the Quantity Demanded for labour has decreased to Q2 and Quantity Supplied has increased to Q3. This results in surplus of labour leading to unemployment.

Positive Effect

High minimum wage can also result in high economic growth. High wages will result in high income for workers. This means that workers are likely to have a higher marginal propensity to consume means that they can spend high % of extra pay. This could also cause a multiplier effect, with higher spending causing positive effects to elsewhere in the economy; this should help boost economic growth

Conclusion

In real world a minimum wage may not cause any unemployment. Labour markets are not perfectly competitive but have a degree of monopsony power. Due to higher minimum wages some workers will have increased real income resulting in increase demand. Demand for labour may be wage inelastic. Firms just pay higher wages and there is little fall in demand. Effect of inflation will also be limited because minimum wage will affect Aggregate Demand by small amount. Until and Unless the minimum wage is increased by a fairly big amount the impact on macro economy is limited. A $15 statewise minimum wage would generate a significant increase in earnings of workers while creating a small price increase borne by all consumers.