Recently President Obama has advocated for an increase in the minimum wage. At t
ID: 1216173 • Letter: R
Question
Recently President Obama has advocated for an increase in the minimum wage. At the same time there have been organized labor movements arguing that the wage paid to fast food workers be raised to $15 per hour. What are the standard economic arguments against raising the minimum wage? Would these arguments still go through if we believed that a worker's marginal product was affected by his or her wage level? Finally, use some economic analysis to provide some reasoning as to what might happen was the wage for fast food workers indeed raised to $15 per hour.
Explanation / Answer
Wages is the remmuneration paid to laborers for using their service in production activities. It is a component of total cost. If wages is raised, then cost of production will rise. It will be recovered by charging higher price. In this problem, fast food workers are trying to raise minimum wages to $15 per hour. Standard economic argument is it will increase price of fast food.
This argument will not be valid, if due to increase in miimum wages, workers are better off. As a result productivity of fast food has increased. So whatever extra payment is made can be compensated by selling extra unit produced. Price of fast food in that case will not increase. So standard argument ogainst raising of minimum wages will be wrong if marginal productivity is increased in consequence.
Finally wages of fast food laborers are raised to $15. Consequences are-
1. Immediately cost of fast food will increase. It will be recovered by charging extra price for fast food.
2. Due to increase in price, demand of fast food will decrease. However extent of decrease in quantity, will depend upon the elasticity of product. If fast food is essential item, then due to 1% increase in price, demand will decrease less than one percent. So total revenue of seller will increase.
3. There will be a temporary imbalance in the fast food market. Demand will be less than supply. It will compel firm to reduce the price, until demand supply parity is restored.
4. Due to minimum wage increase, employer will try to do the work with less number of workers. So some workers may loss the job. Unemployment will rise.
5. As minimum wage has been raised, new workers will be attracted to this industry. It will increase supply of labor. Thus unemployment rate in this segment will increase further.
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