Link between Higher Minimum Wage and Higher Unemployment

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In theory when an increase in minimum wage increases the cost of low-wage workers firms should want to hire less workers, however in reality this basic theory might be wrong according to Plumer B. (2013) While some studies found a link between higher minimum wage and higher unemployment level many others such as a recent paper from U.C. Berkeley that exploited differences across state borders did not find a link between higher minimum wage and higher unemployment.
A study by John Schmitt of the Center for Economic and Policy Research explores the other possible reasons a modest increase in the minimum wage may not significantly impact employment levels. According to his study instead of hiring less workers the labor markets can respond in the following ways:
• Employers can decrease benefits, hours or training.
• Employers can decrease wages for more experienced workers by delay or limit pay raises or bonuses.
• Employers can become more efficient.
• Companies can raise their prices of their products or services.
• Companies can just settle for fewer profits by absorbing the increase labor cost.
• Companies can save on labor cost, as a result there is less employee turnover.
• Workers can respond by voluntarily working harder.
Schmitt concludes that how individual firms react to the increase depends on a complex set of circumstances that economists cannot fully capture or explain and this could explain why economists often have trouble establishing a clear link between a higher minimum wage and higher unemployment.
INTRODUCTION

Minimum wage was established under the Fair Labor Standards Act of 1938. Overall, the minimum wage was established to help alleviate the standard of living of low-skilled workers, whether the minimum...

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...ill believe the basic theory still holds. Even if the employer does not decrease their labor demand because another theory states the category of labor is inelastic I believe the employer will cut back on a labor expense that may directly or indirectly impact employees in order to make up for the increase in wages. We have been told that nothing is not for free, so why would employers not alter their behavior by hiring less employees or cutting back on a labor expense. In my opinion if they did not react at all they would be giving away free money to their employees and we all know there is nothing like a free lunch especially in this current economy, so why start believing now. Putting all the theories a side and evaluate the current situation minimum wage increases unemployment, however by how much is determined by whether the increase was small or big increase.

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