Question

Instructions: Answers to each of the following problems will be evaluated based on accuracy, completeness and clarity. Unsupported answers will receive no credit. Any assumptions you make in answering the questions should be clearly stated. Point allocation is given beside each question Suppose Oregon proposes indexing the minimum wage to inflation. In the space below, summarize what it would mean to index the minimum wage to inflation, and then describe the substitution and scale effects you anticipate with this policy? (In your response, assume that the minimum wage is an effective price floor and that both factor and product markets are perfectly competitive.) 问题9 2分 What does it mean to index a minimum wage to inflation? HTML编辑 0字

Answer 1

The automatic adjustment of the minimum wage rate with the increasing cost of inflation to retain the purchasing power of the minimum wage workers is the indexing of minimum wage to inflation. This is basically a protective policy for the lower wage/salary earners.

If the increase in the wage rate is temporary then the producers may not go for possible capital substitution for labor but if the increase in wage rate is significant and permanent then producers will go for cost-effective capital substitutes for labor.

In the short run increase in wage rate the scale effect; the effect on the change in the output will be minimum. But in the long run prices of products will increase due to an increase in the prices of products due to the higher cost of factor input labor resulting in the contraction of the market size due to higher prices which will lead to less employment.