The minimum wage was increased in 1996 amid cries by many economists that it wou

Question

The minimum wage was increased in 1996 amid cries by many economists that it would cause unemployment. Critics pointed out that the last time the minimum wage went up the same dire predictions from economists were made, but more people were employed after the minimum wage increase. The same, they argued, would occur again. How it may be possible for increases in the minimum wage to have little impact on employment levels. Please explain using the following concepts: a) long-run versus short-run; b) fixed inputs; and c) increase demand/output

Explanation / Answer

ANSWER: The confusion arises over what the minimum wage increase would do in the short run versus the long run. In the short run, capital is assumed to be fixed. As a result, the firm probably would continue to employ the same number of individuals as before the wage increase until the relatively cheaper capital could be obtained to substitute for the relatively more expensive labor. In the interim, if the demand for the roduct increased, the firm might find it profitable to expand output and thus hire more capital and more labor. In the isoquant-isocost graph below, the firm is initially at point A. If the price of labor increases, the

budget line pivots in to line BB

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