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Effects Of Minimum Wage On Unemployment

1922 Words8 Pages

This paper aims to analyze the effects of minimum wage on equality and unemployment from various perspectives. First of all, theories from welfare economics have been used to explain the effects of minimum wage of equality and unemployment. Moreover, statistics and data related to effects of minimum wage on equality and unemployment have been collected from World Bank database and thereby analyzed using graphical tools. Lastly, insights from economic journals and articles related to effects of minimum wage on equality and unemployment have been discussed. 2. Theoretical analysis: 2.1. Effect of minimum wage on unemployment from theoretical perspective: Some economics theories assert that minimum wage legislation leads to a rise in unemployment, …show more content…

That is, the employers demand labor equal to Qe regardless of the wage rate, probably because employees have unique skills and talents. In such a case, if the minimum wage rises then there would be no change in the employment level i.e. it would remain equal to Qe. Moreover, if the minimum wage is set below the equilibrium wage then again there would be no impact on the employment level since that minimum wage legislation would be non – binding. (Besanko, David, Dranove, & Shanley, 2000) 2.2. Effect of minimum wage on equality from theoretical perspective: Minimum wage legislation is good for those employees who remain employed after the legislation as they are now getting higher wages as compared to before. (Mankiw, 2008) But it is bad for those employees who get laid off (i.e. become unemployed) because the employers now find it expensive to hire them due to the minimum wage legislation. (Besanko, David, Dranove, & Shanley, 2000) Thus, minimum wage leads to a rise in inequality. This would be explained using a hypothetical example. Suppose there were two people in the economy A and B who were getting equal wages $10. Now there is enactment of the minimum wage legislation that employers must pay atleast $12 wages. Due to this legislation, the employer decided to keep employee A in his firm and lay off employee B because employee A was better at work than employee B. Thus, now employee A earns $12 (i.e. $2 higher than …show more content…

minimum wage legislation leads to a rise in unemployment rate in case of USA. The effect of minimum wage on unemployment rate in case of UK is depicted below: The upward sloping trend line and positive regression coefficient (+1.717) in the graph above shows that the effect of minimum wage on unemployment rate is positive i.e. minimum wage legislation leads to a rise in unemployment rate in case of UK as well. 3.2. Effect of minimum wage on equality from empirical perspective: Data on minimum wages and Gini index of various countries has been retrieved from Federal Reserve Bank of ST. Louis respectively. This data has been analyzed using graphical tools as follows in order to determine the effect of minimum wage legislation on equality. The effect of minimum wage on equality in case of USA is depicted below: The upward sloping trend line and positive regression coefficient (+0.7138) in the graph above shows that the effect of minimum wage on Gini index (inequality) is positive i.e. minimum wage legislation leads to a rise in inequality (and fall in equality) in case of

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