Question

1. San Francisco raised the city minimum wage over 25% in 2004. How did this increase affect employment in the restaurant sector?
2. Is it likely that an increase in the minimum wage results in a price increase of about the same magnitude, e.g. 50% increase in the minimum wage leads to a 50% increase in prices? Explain.

Answer 1

a. Increase in the minimum wage of the city will increase cost of production in San Francisco because wages paid to the labourers will increase. The increase in the wages paid to the labourers will reduce demand for workers and as demand for workers gets reduced, the level of employment falls and level of unemployment increases in the restaurant sector.

b. Increase in the price level caused by the increase in the minimum wage rate in the economy depends on the elasticity of supply of the good. If elasticity of supply is elastic or more than 1, then increase in prices will be less than increase in minimum wage rate. On the other hand, if elasticity of supply is less than 1, then increase in prices will be more than increase in minimum wage rate.