Impact of Minimum Wage on Unemployement

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“We cannot unambiguously conclude that a minimum wage increase will increase unemployment levels”. Discuss.

The essay is outline as follows. Firstly, I would define some of the key terms. Secondly, I would outline the reasons for the statement. Lastly, I would provide the concluding remarks.

Unemployment is when those members of the labour force who are willing and able to work cannot find a job. Minimum Wage

In a perfectly competitive labour market, the equilibrium wage should be W1, where labour supply = labour demand. Wages are artificially altered when the price floor is imposed. An increase in the wage rate encourages the economically inactive to enter the labour market, causing an expansion in the supply of labour. The minimum wage raises the marginal cost of employing workers, thereby causing a contraction of labour demand. From an excess supply of labour, only the workers who are skilled will be employed. The least skilled, thus least productive will be priced out of the market leaving them involuntarily unemployed. The change in employment levels is the product of the elasticity of labour demand multiplied by the proportional rise in the wage.

Any increase in the minimum wage will be passed on to consumer prices. If demand for the product is inelastic, the increased price will not effect consumption of the good to a great extent. So employment rates would remain relatively the same. The opposite effect would happen for elastic good. If labour costs make up a small proportion of total costs, then any increases in the wage rate would have little effect on employment, as total costs would have only increased by a small amount. Where labour and supply are both inelastic, employment costs are minimised. If they are both elastic, more jobs are lost.

Although according to classical theories, the reason that minimum wage increase will increase unemployment levels is because minimum wage would increase the cost of labour, which lead to an...
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