How The Minimum Wage Affects The Economy

In a pure economics sense, Brown, Gilroy and Kohen(1982) states that “the effect of the minimum wage in the simplest is that employment is reduced and the efficiency of the labour market is impaired because some individuals whose marginal product exceeds their reservation wage are unable to work” (Brown, Gilroy and Kohen, 1982).
The “employment effect” (De Fraja, 1999) suggests that an increase in minimum wage will restrict job opportunities, resulting in a loss of jobs and potential lowering of the participation rate. On the other hand, more people will potentially be lured to the job market by higher paying jobs. Brown (1998) states that these views are theoretical and don’t necessarily equate to what will occur due to arrange of other issues such as whether displaced workers continue to look for employment and hence remain part of the participation rate. Also if an economy is in a growth cycle then it is unlikely unemployment would result from a minimum wage increase.
As seen from these sources, this economic viewpoint is correct, the minimum wage does lead to inefficiencies in the market place, however the minimum wage has been introduced for broader reasons such as welfare and political.
Employers are in a position where they need to absorb the
This may be offset by higher prices that suppliers will charge due to the increased cost of producing goods or services. It is important to note that not everyone in the labour market is paid at the minimum wage and not all products and services would be impacted as they may not require minimum wage labour. This will be discussed further when we look at the demographics of who is impacted by the minimum wage in Australia. If firms are not efficient at clawing back the extra cost introduced by the minimum wage, then it could mean lower profit for firms that use minimum (or near minimum) wage