Why Minimum Wages Probably Do Not Hurt the Economy?

Why minimum wages probably do not hurt the economy?

Minimum wage is defined as an hourly salary required by law paid to works. Also, it is the lowest wages that workers can accept to work for employers. In the US, different states set minimum wages in accordance with their actual economic level. The current federal minimum wage is $7.25 per hour. As for the benefits and drawbacks of the minimum wages, academic world has a lot of argument. Based on the an analysis of the labor demand and supply, the minimum wage above the equilibrium point usually cause the unemployment and hurt the economy. However, in the real world, the setting of minimum wage may have three fundamental positive effects on the economy, such as stimulating consumption, motivating workers’ skills and enthusiasm, and decreasing the governmental costs in welfare programs.

The three facts provided in the selective article are the most representative opponent opinions about minimum wages. According to the article, minimum wages mean more unemployed workers. Most affected employees work in small business such as local restaurant, coffee shop or this kind of low-profit firms. These businesses usually tend to decrease the employment in response to the minimum wage which is greater than their acceptable salary costs. The second fact presented in the article is that minimum wage has nothing to do with reducing poverty. The prior data in 28 states show no association between minimum wage and poverty rates. Many workers covered by the minimum wage can’t benefit from it, because they need a job more than the minimum wage.

According to microeconomic analysis of the law of demand and supply, the minimum wage is just like a price floor set above the equilibrium point of demand curve and supply curve of labor. This price floor usually cause unemployment, because more people are intend to work at the higher wage while smaller numbers of jobs are available at this wage. When more workers are competing for one position, companies will also become more selective and the low-level workers will be unemployed. In general, minimum wages will only cause unemployment in the low-skill labor market, because the minimum wage is already above or at the equilibrium wage, however, the minimum wages almost has no effect on the employment of higher labor market.

An economic graph putting wage on the vertical axis and the quantity (hours) of labor supplied on the horizontal axis can be used to understand the relationship between minimum wages and employment. When a minimum wage is imposed above the equilibrium price, the workers are more willing to be employed, and thus the quantity of labor on the supply curve will move upward to right. Since the cost of a company and the wage rate are positively related, higher wage rate means higher cost of a company. In order to maintain the cost not change, the company will decrease the quantity demand of labor. The change of demand and supply curve will thus create a surplus of labor which is unemployment.