Minimum Wage Causes Unemployment

treats the idea that a minimum wage causes unemployment as a myth. The Department argues that an analysis of 64 studies on minimum wage rises found no apparent effect on employment. In addition, more than 600 economists, seven of them Nobel Prize winners in economics, have signed onto a letter in help of increasing the minimum wage to $10.10 in the next two years. In 1994, Card and Krueger suggested that minimum wages may not necessarily decrease employment, but can actually increase it. It is hard to believe that a price floor may lead to an increase in quantity of labour employed in competitive labour markets.

However, it is not so hard to believe, when discussion comes to oligopsony and monopolistic competition labour markets, where multiple

As it is stated by Bashkar, Manning and To (2002), in particular, effects differ, if numerous employers compete for employees. The labour supply curve faced by firm i shifts to the left. This is illustrated on Graph 2, where the labour supply curve shifts to LS’i, and thus the marginal cost of labour shifts to MC’i. The new profit-maximizing level of employment takes place at L’’i. A minimum wage set reasonably over the market wage can still cause establishment-level employment to upsurge, despite the decline in establishment-level labour supply. That is because if all firms offer higher wages, the labour participation rate must increase too. So, even in the case of multiple employers, a minimum wage set reasonably higher that the market wage can increase employment through bigger labour market participation

A binding minimum wage, a minimum wage set above the market wage, leads to a reduction in employers’ profits. If there is monopolistic competition in the market, meaning there are no exit barriers, then some employers will be forced to exit out of the market. Employer exit has a negative effect on overall employment through the loss of employment opportunities. Therefore, minimum wages have two conflicting effects, the employment-increasing “oligopsony” effect and the employment-reducing “exit” effect. The overall effect of a minimum wage depends on which of the effects dominates. Some authors such as Walsh (2001) or Bashkar and To (1999) claim that the net effect has shown to be positive. However, at a later stage, in 2001, Bashkar and To used a different model of worker preferences and state that the net effect seems to be negative. The conclusion is that - under an oligopsony and monopolistic competition - a minimum wage set reasonably above the market wage may have positive or negative effects on employment, and the size of the effect will usually be small because of two conflicting