Question

OFF sve ons of the Week-Ali Rohail W M3 Questions of the Week - Saved to my Ma w Design Layout References Mailings » Tell me Shar V A Bo... 12 • A Aa EE U v ab X, X A2A e. BONUS: Can you prove mathematically your answer to d? f. BONUS: Calculate the deadweight loss of this policy. V V Styles 21 Proponents of minimum wages argue that a floor on earnings for low-skilled labor helps to alleviate poverty and improve income inequality. a. Suppose that the equilibrium wage in the market for low-skilled labor this market is $8 per hour and the minimum wage is set at $10 per hour. Demonstrate this minimum wage policy in a labor market graph. Be sure to show both the initial equilibrium and clearly label the minimum wage. label the vertical and horizontal axes and all lines. b. What are some (list and discuss 3) unintended consequences of minimum wages we would expect as economists? i.e. address how the minimum wage impacts the incentives for both firms and job seekers or those already employed in this market. C. To what extent does this policy meet the stated goal to alleviate poverty? Defend your answer.

Answer 1

Part A)

Across the United States, and in various countries, minimum wages are used as a tool to make sure that the lowest sections of the society live a comfortable life. The minimum wages are for those that work on by the hour jobs and are paid the lowest salaries accordingly the impact on their life is such that with extremely low wages they are unable to demand for goods and services and their access to modern facilities such as healthcare, nutrition etc all take a deep hit.

The following is the graph which will explain the effects of a hike in the minimum wage on the labour demand and supply market graph.

Wages Supply Curve 10$ 8$ Initial quilibrium Demand Curve Quantity of Labor Q1 02 Labor Demand and Supply Curve

In the graph above, we see that the price of the labour force rises from 8$ to 10$ this is indicated via the shift in the wages on the Y axis in the graph.

The demand graph has been indicated as a downward sloping one, which indicates that with a fall in prices the demand increases and with an increase in prices demand will fall. Similarly, a supply graph has been drawn indicating that with a rise in price, the supply increases and with a decline the supply also falls.

Here, in the graph we see that as the minimum wages rise, the resultant is that the equilibrium changes and happens at a level, wherein the demand is lesser than it earlier used to be at Q1 quantity of labour force and the supply is higher at Q2 quantity.

This happens due to a reason that as the prices for the workforce increase, producers prefer taking the production facility elsewhere into countries which may offer benefits of production at a lower cost since they have to spend more money within the country for acquiring the same quantity of labour.

On the contrary as a higher rate is available per hour for minimum wages, the supply increases as more people come in to seek jobs for themselves.

B)

As economist, we are aware of the fact that with a rise in income levels of people, their access to modern day facilities such as health care, nutrition and others may rise. However, we need to keep in mind that this increases the aggregate or total demand for goods and services in the country as now, the people have higher purchasing capacity.

The unintended results of this for the economy as a whole are that the country may see some level of inflation coming back to the economy as the flow of money increases due to the increased supply to the working population.

Further, this also helps in growing the economy, as with demand the suppliers also come into the market place and helps in increasing the total supply and therefore the total Gross Domestic Product of the country which is the value of final goods and services in the country also sees a huge surge.

As explained in the sections above, for firms the unintended outcome is that the cost of operations increases. They need to then pay higher wages and their total costs and prices of goods which they produce increases. The positive externality is that they may see higher demand for goods and services. Some may even be forced to take their production abroad if they have the required capital to do so.

On the workers front, the unintended result is that they increase their consumption though jobs in availability may decrease for new employees. The existing ones however may see an increase in their overall income and consumption. This means that new jobs will dry up while those already employed may see additional income for themselves.

C)  

The process of increasing the minimum wages of a country has indeed helped countries in staying afloat and increasing their lifestyle and livelihood.

As income increases, people’s access to modern day education, health care and nutrition also increases. This has a major impact on the productivity of the nation which grows and begins demanding more goods and services.

The end result in the long run is that it helps in creating a market wherein the demand for goods and services is higher due to increased income and producers also do not mind paying additional salary as long as the demand and profits are increasing.

The only risk for an economy is that producers may be forced to take low level jobs of production and others to outsourced countries which may dent the economy. The key here is to keep a balance between increasing the minimum wages and the cost of operations for business owners.

Please feel free to ask your doubts in the comments section if any.