Question

A lot of what one might call the "economics of minimum wage laws" might be considered micro in nature. But explain how it/they could factor into macroeconomics?

Answer 1

Minimum wages cause unemployment, but it depends on a company's’ demand of labour elasticity.If labor is inelastic than a few workers will loss their jobs, rather than if its labor demand is elastic, means it has substitute factors to use as factor of production.In reality, minimum wages are bad if there is no other market failures such as labor exploitation, employers have the most advantage /profit, what do we call disproportionate factor price.At that time there must be intervention to reduce income share distortion,by underpricing capital owners and overpricing labor wages.

According to microeconomic theory that the minimum wage laws reduce employment is not supported by empirical studies. It was also surprising that most of the empirical studies were based on the experience of European economies and the experience of the economy of the United States. We observed this as an important gap in the research done by labor economists in India. The fact that the minimum wage legislations do not result in unemployment is also supported by the fact that the demand of a factor is not solely determined by its own price (i.e., wages). It also depends on the price of its substitute (i.e., the price of capital) and the overall growth rate of the industry/economy. Even the price of the product, which is being produced by the workers, determines the demand for labor. If the price of the product is rising much faster than the wage rate, the impact of wages on employment declines.

It has also been observed that in the case of developing economies, the minimum wages fixed by the authorities are too low to affect unemployment. Studies conducted by the International Labour Organization have identified that the minimum wages fixed by the authorities are generally equal to the current wage rate prevailing in the small enterprises of these economies.