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Economic Effects of Minimum Wage Fixation - Essay Example

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This essay aims to distinguish the correlation between minimum wage and employment rates, from the causal effect of minimum wage on employment. Assumptions of three different theoretic models of labor are analized to discover the economic effects of minimum wage fixation…
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Economic Effects of Minimum Wage Fixation
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Download file to see previous pages On the other hand, the efficiency wage model of labor observes that increasing the wages for the workers will motivate them to work even harder, while increasing their fear of losing their jobs which are well paying (Ehrenberg and Smith, 94). This boosts the morale of the workers and make them highly motivated while undertaking their duties, an aspect that increases their productivity, and by extension, the productivity of the firm and the whole industry. This way, more employment is created, since improved productivity comes with increased opportunities (Ehrenberg and Smith, 378). Thus, according to the efficiency wage model, fixing the minimum wage, to a level higher than the competitive wage level, will promote productivity and discourage labor turnover, thus increase employment. Therefore, assuming the employment will continue rising as it has happened since June 2009, the empirical researchers need to face the following issues, to distinguish the correlation between minimum wage and employment rates, from the causal effect of minimum wage on employment. First, the empirical researchers should understand the issue of market operations, whereby different types of markets will give different results, when it comes to the relationship between minimum wage and employment. For example, an open competitive market will give different results, compared to a monopsony market, when it comes to the correlation between minimum wage and employment (Ehrenberg and Smith, 112). Secondly, the researchers need to understand the nature of the movement of the wages and the maximum level attainable in minimum wage fixation, before the correlation between the minimum wage and the employment changes from...
This essay critically review the impacts of the introduction of the theoretic concept of minimum wage fixation into the real economy. This concept has had double impacts on employment and the economy at large. While the main idea behind fixing minimum wage that workers should be paid is to make the lives of the workers better, through affording them a substantial income, it may affect the same workers, especially those with low skills negatively
According to the standard competitive model of labor, fixing a minimum wage has the impact of increasing unemployment, through he creation of involuntary unemployment, where individuals can continuously apply concerted efforts o seek for a job but find none
The case is different according to the Monopsony model of labor, which holds that the fixation of minimum wages has the effect of increasing employment, most especially when the wage is being increased from levels lower than the competitive wage, to reach the competitive wage levels
On the other hand, the efficiency wage model of labor observes that increasing the wages for the workers will motivate them to work even harder, while increasing their fear of losing their jobs which are well paying
The minimum wage can only go high, up to the competitive wage level, after which it will start having negative impacts. An increase in wage level from levels lower than the competitive levels has the impact of boosting the morale of the workers and increasing their levels of motivation, thus increasing their productivity, and consequently that of the firms
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