Microeconomics (EC2021C)

This paper focuses on the costs of a rise in minimum wage, the benefits of a rise in minimum wage and finally the effect of a rise in the minimum wage when the labor market is monopsonistic. The paper discusses the effect of this rise on the supply and demand curve on labor, effect on price, effect on the standard of living and how this increase will lead to unemployment and increased outsourcing in other lower minimum wage countries.
We first analyze the effect of an increase in minimum wage rates on the supply and the demand for labor in a competitive market, in a competitive market demand increases when wages decline and demand declines when wage rates increase. Supply of labor increases when the wage rates rise, and that supply of labor decline when wage rates are reduced, therefore an increase in minimum wage rates will increase supply and reduce demand.
From the above chart an increase in the minimum wage will lead to an increase in the supply of labor, the rationale behind this increase is because as minimum wage increase then more workers will be willing and also encouraged to work more labor hours and therefore supply of labor will increase.
Considering that labor is factor of production …
t labor is factor of production and that firms will consider labor as a production cost then if the cost of labor increases then firms will demand less of labor, this can also be explained by the fact that firms will determine the optimal production point using the budget line and the isoquants, therefore an increase in cost of labor will lead to substitution of labor for capital and therefore less labor will be demanded, the diagram below demonstrates the effect of this increase on labor demand:
From the above diagram it is evident that an increase in minimum wage will lead to a decline in the demand for labor, therefore this will result into less employment in an economy.
Benefits of increased minimum wage:
Standard of living:
An increase in minimum wage will result into an increase in living standards, workers will now be paid higher wage rates and for this reason there will be a rise in living standards, this will be realized because workers will now have a larger disposable income and therefore can afford more in the economy.
Motivation of workers:
Workers in the economy will be more motivated, according to various studies increased wages result into increased motivation and therefore increased productivity of labor, when productivity of labor increases then the firm will benefit because the firm becomes more productive. Economic growth will also be realized due to increased productivity of laborers in the economy and therefore higher growth.
Increased consumption:
When minimum wage is increased consumers will experience a rise in their income, a rise in the income level also signifies a rise in the consumer disposable income, therefore as disposable income increases there will be a rise in the consumption levels in an economy. This will benefit the economy