After years of no change, a few years ago, we had a three phased increase in min
ID: 1224709 • Letter: A
Question
After years of no change, a few years ago, we had a three phased increase in minimum wage. Now we are discussing raising it further, to $10.10 an hour Are people that work for minimum wage better off after an increase in minimum wage? Why or why not? Think about this from the perspective of the business. What will a business do if it is faced with an increase in labor cost?
How will this impact people that previously earned $11.00 an hour? Will they get an increase as well?
Before the last increase, the unemployment rate was 4.7%; after the increase, the unemployment rate rose to 10% and although declining now, is still over 6%. Could there be a relationship between the increase in minimum wage and the unemployment rate?
Explanation / Answer
Costs and profits have inverse relationship. Increase in costs results in decrease in profits while decrease in costs results in increase in profits.
When minimum wage is increased then labor cost of businesses also increases. This increase in labor cost and thereby cost of production result in decrease in profitability which compels the businesses to curtail production and laid-off workers.
So, in a way, increase in minimum wage results in rise in unemployment rate and many people that work for minimum wage become worse-off after increase in minimum wage due to job loss.
However, not all of the people who work for minimum wage become worse-off.
Some can become better-off as well. This is because those workers who had not lost their job would now be getting higher wage (due to increase in minimum wage) and thus would experience an increase in earning and would become better-off.
Increase in minimum wage rate to $10.10 per hour will not impact the people that are employed at $11.00 per hour as their wage rate is already greater than minimum wage.
Increase in minimum wage rate generally increase unemployment and create situation of excess supply of labor.
With worker in abundance available at $10.10 per hour, firms have lot of options and thus people earning $11.00 per hour would not get increase albeit their wage could decrease due to increase in labor supply.
As stated above that increase in minimum wage rate adversely impact the profitability of firms and compel them to reduce production and employment.
Thus, increase in minimum wage increases the unemployment and thereby unemployment rate.
So, there is direct relationship between the increase in minimum wage and the unemployment rate.