Link between Higher Minimum Wage and Higher Unemployment

1179 WordsJun 16, 20185 Pages
In theory when an increase in minimum wage increases the cost of low-wage workers firms should want to hire less workers, however in reality this basic theory might be wrong according to Plumer B. (2013) While some studies found a link between higher minimum wage and higher unemployment level many others such as a recent paper from U.C. Berkeley that exploited differences across state borders did not find a link between higher minimum wage and higher unemployment. A study by John Schmitt of the Center for Economic and Policy Research explores the other possible reasons a modest increase in the minimum wage may not significantly impact employment levels. According to his study instead of hiring less workers the labor markets can respond in…show more content…
Using this approach causes a substitution effect, because the firms increases the use of capital (robots) and decreases the use of labor. However, in order for the employer to use this approach they must firstly have the financial resources to adjust their operations. Companies can raise their prices in response. – This method is the most common method used by employers. The extra cost for labor is passed on to customers in the form of higher prices. This method, however should only be used if the demand for the product or service is highly inelastic and there are no readily available substitute for that product or service. Companies can just settle for fewer profits by absorbing the increase cost of their current labor supply instead of dismissing workers. This is one method might be the least popular method and the least used by firms. Using this approach decreases the company’s net profit. This method should only be used by firms in a strong financial position and there is no other approach that can be used. Workers can respond by voluntarily working harder. – Legislated increases in the minimum wage improves workers morale thereby increasing their productivity. The increase in productivity helps balance off the increase in labor cost. An increased wage rate causes an income and substitute effect. Income effect causes the worker to work fewer hours now that their income increased. Substitution effect causes the worker to work more hours. Companies can save on
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