Minimum wage vs unemployment rate

Topics: Minimum wage, Employment, Unemployment Pages: 9 (2276 words) Published: February 8, 2014
The Effect of Minimum Wage in Unemployment Rate

I. Introduction
Minimum wage is the lowest hourly wage that employers can legally pay to workers. The policy makers claim that the purpose of the minimum wage law is to increase the standard of living of workers and reduces poverty. However, there are critics about minimum wage would increases poverty by increasing unemployment rate. This topic has been debated for over 6 decades, there are significant numbers of studies of the minimum wage on employment in the United States have been published. Most of the studies approached by the employment-to population rate of teenagers with relative level of the minimum wage, hence in this paper, I am attempting to examine the effect of minimum wage on unemployment rate with a new approach by using different control variables, consumer price index (CPI) and treasury constant maturities to create a fixed-effect panel data regression. Demand & Supply Theory [1]

My hypothesis is that minimum wage affects unemployment rate in a positive way. In other words, when minimum wage increases by a positive amount, one should expect that unemployment rate will also increase. This is based on the basic theory of demand and supply, business owners often make decisions based it. When the demand for certain product increases, companies must increase their production output to meet the demand. Increasing supply usually requires additional labor. When the wages of the employees increased, the employer’s demand of hiring employees will decrease. Minimum wage is creating a price floor; the demand and supply will no longer be equilibrium. As the price floor goes up, there will be more surplus. Therefore, the unemployment rate will increase when the minimum wage increased. [See Figure 1]


Goal of this Study
This research topic is an important one, especially using a different approach. Because it could start a new movement of the study of minimum wage on unemployment rate by provide a new prospective to the scholars who are also studying in this topic. There will be more new ideas and thoughts. The ultimate goal is to have more statistical evidence and studies to assist the policy makers to adjust, modify and improve the current policies, in order to increase the standard of living of the workers and reduce poverty in a more efficient approach.

II. Literature Review
In this part, there are literature reviews of the economic concepts of the three main articles. Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply Card and Krueger (2000) develop a case study of the fast-food industry in New Jersey and Pennsylvania. Their main assumptions are that the increase in New Jersey’s minimum wage in April 1992 probably had no effect on total employment in the state, and possibly had a small positive effect, although there may have been individual restaurants where employment rose or fell in response to the higher minimum wage; Using a dataset from the Bureau of Labor Statistics’s (BLS’s) employer-reported ES-202 data file to examine employment growth of fast-food restaurants in a set of major chains in New Jersey and nearby counties of Pennsylvania, their empirical findings are that representative samples show statistically insignificant and small differences in employment growth between New Jersey and eastern Pennsylvania, which is a complete opposite of my assumption. Card and Krueger (2000) mentioned at the end of the article that hours grew more at restaurant in the lowest wage areas of the state, where the minimum-wage increase is a binding constraint to counter the view that total hours declined in response to the New Jersey minimum wage increase. I am skeptical about this finding, because by the demand and supply theory [1], the employment rate or total hours of...
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