How Minimum Wage Could Result in Economic Problems - Essay Example

Labor regulations like the ‘minimum wage’ affect the price signals in the market by disturbing the supply and demand. The differences between the supply and demand for labor could harm many people with the use of a minimum wage. This is true in the sense that increasing the minimum wage could result in an increase in the prices of goods. High prices of goods will eventually decrease the demand for specific goods. Thus, people would tend to look for alternative sources of a similar item in order to maximize the value of their money. The SRAS curve would shift to the left; it means a decrease in the number of goods sold as prices of goods increase. (See Figure 1 – Aggregate Supply and Demand when Minimum Wage is Increased on page 4)

Increasing the minimum wage could affect U.S. international competitiveness and labor freedom. People who support an increase in the minimum wage insist that it would help the poor and less-skilled workers. However, government intervention on this matter has an adverse effect on the marketplace. The increase in the minimum wage could affect the supply and demand curve leading to a less efficient allocation of labor. Thus, resulting in an increase in the unemployment rate. (See Figure II – Supply and Demand of Labor When an Increase in Minimum Wage is Implemented on page 4)

Each time the equilibrium real wage is not equal to the market-clearing real wage, the real wage becomes too high. In this case, some businesses would be forced not to hire additional manpower. For companies that are experiencing a bad business performance combined with a bad economic situation, some of these firms may choose to implement mass lay-offs or simply declare bankruptcy or closure. It simply proves that increasing the real wage too high would result in involuntary unemployment.

Determining wage efficiency is important in making decisions on whether to increase or decrease the minimum wage. Both ways could affect the performance of the company. Increasing the wage could motivate the worker to perform well in his job. On the other hand, the worker tends to work below his capacity due to a lack of financial motivation. On the part of the company, the firm wants to maximize the most of each dollar spent on wages. Either way, increasing or decreasing the minimum wage should always be above the market-clearing wage.

Conclusion
In deciding whether to increase or maintain the minimum wage, a lot of factors should be taken into consideration. Such increasing the minimum wage too much would have an adverse effect on the country’s economy in terms of a sudden increase in the unemployment rate (involuntary unemployment) and a disturbance in the supply and demand of goods and services.

Not allowing an increase in the nominal wage could have a negative effect too in the sense that workers will not be motivated to work at their best efforts. The lack of motivation in manpower would also have an indirect effect on the whole economy of the country.

For this reason, the increase in the minimum wage should be limited or a gradual increase in the minimum wage should be implemented over time. This will allow the market to have time to adjust to its equilibrium and avoid demand and supply shock within the U.S. economy. Read More