Economic Effect Of Minimum Wage Essay

Economic Effect of Minimum Wage During the Great Depression, many people were faced with unemployment and desperately tried to seek employment. Many employers tried to advantage of the labor market and hire for very little pay wages. In order to prevent the exploitation of cheap labor, the United States stepped in and passed the Fair Labor Standards Act of 1938, which dictated a minimum hourly rate of $.25 cents per hour. David Cooper, senior economic analyst and deputy director at Economic Analysis and Research Network at the Economic Policy Institute explains, “Without a wage floor, employers would continue to pay less and less, destroying the purchasing power of the consumers who would make less money.” (Dixon, 2017, para. 2). The principal of minimum wage is one of necessity for several reason including ensuring workers earn enough to live and to protect taxpayers from employers exploiting workers to get something for nothing. When analyzing Minimum Wage,
individuals must study the monetary effects of social and government policies. In addition, one must look at supply and demand of minimum wage and determine what elasticity conditions would prove the economic theory.
Economic Theory There are many economic principles in which a nation is built upon. Minimum wage is one such principle affecting the income of a citizens within a nation. Although, minimum wage in its simplest form is to maintain a minimum quality of life, wage laws can have both positive and negative effects on an economy. The fact is minimum wage is a government-imposed price control in which they set a price floor indicating the minimum price for a certain good or service must be paid (Vitez, 2018). The government controls the price to ensure workers receive a fair wage for various positions of employment, which generally requires basic, nontechnical skills to be employed. For the employer, by offering minimum wage they may be able to avoid having to offer employment benefits by taking advantage of using part-time employees and create a cost savings to the organization by not paying out overtime. Furthermore, minimum wage laws forces organizations to pay all individuals equally, regardless of their religion, race, sex or ethnicity. The effects of minimum wage laws also have unintended consequences such as increasing a person’s tax liability. In a nation where progressive income tax systems exist, it will require one to pay and increased amount of taxes (Vitez, 2018). Moreover, higher minimum wages could significantly increase labor expenses for organizations, which could force layoffs to employees. Since organizations often make decisions based on supply and demand, companies may forgo additional labor if the government forces companies to pay higher employee wages than what the position is worth. Therefore, an economist must look at how minimum wage effects supply and demand.
Supply and Demand Joan Robinson, Cambridge University Economist wrote, “The hidden hand will always do its work but it may work by strangulation” (Cooper & John, 2018, para. 1). Her meaning behind this statement was that there was no guarantee that an equilibrium wage in the market would in fact be a living wage. The concept of the demand curve measures the economic demand for labor needed by a firm willing to hire at different wages. Furthermore, the concept of the supply curve measures the laborers needed by the same organization willing to work at different wages. When minimum wage is imposed, organizations are not legally permitted to pay less than the mandated wage set by the government. In Figure 1. it is demonstrated by showing a market where the equilibrium wage is $4 per hour. When the government mandates a minimum wage of $5 per hour, we see that the supply for labor does not equal the demand for labor. Therefore, while individuals who are employed are earning a higher wage, there are individuals who no longer have jobs, thus employment decreases (Cooper & John, 2018). Additionally, government imposed wages will initiate more laborers to want to work but there are not enough jobs to fill the need, thus minimum wage creates unemployment (Cooper & John, 2018).
Figure 1.

Elasticity A common assumption regarding minimum wage is that workers at a low-wage benefit collectively from total wage income increases.
Therefore, laborers would benefit when the minimum wage rate is at a level where the cumulative demand for labor at a low wage is unitary elastic and would additionally benefit by increases in the minimum rate provided the cumulative demand for labor is inelastic. Moreover, some economists feel there is a close correlation between raising the minimum wage rate in order to improve the livelihood of workers at a low wage and the inelasticity of the demand for their labor (Danziger, 2009). However, labor with a downward sloping demand curve, legislation that raises laborers wages above the equilibrium will unavoidably lead to the loss of jobs. Therefore, it exists a crucial value of elasticity of labor demand such that the rise in the minimum wage rate makes laborers with low pay better off for higher elasticities, but worse off for lower elasticities (Danziger,
2009).
Conclusion
While minimum wage laws are a necessity in order to avoid employers seeking labor from taking advantage of the labor market as such during the Great Depression, not all aspects of minimum wage benefits the laborers. The government may study minimum wage laws to warrant nonskilled laborers are appropriately receiving compensation for the services, however, skilled laborers do not benefit from the minimum wage laws. Additionally, when we see the government increase the minimum wage rate we see the demand for labor does not meet the supply for labor, thus throwing off the equilibrium. Finally, workers benefit at a wage rate that is level with the cumulative demand for labor at a lower wage is unitary elastic and the aggregate demand for labor is inelastic.