Question

An increase in the minimum wage is not a long-term solution to the problems faced by “the working poor.” Why? Illustrate a better long-term solution using the labor market graph.

Answer 1

A minimum wage will not work in the long run as it can always prevent employers from taking on more people. A minimum wage will always be set above the market price and so in such a situation there will be an excess supply as supply exceeds demand. So this will simply increase the levels of unemployment which will not aid the working power as layoffs will rise. This is given with the minimum wage at W1 below as supply exceeds demand and so there is unemployment at that wage. An alternative solution to this would be if the minimum wage is kept at W1 in the graph below but the excess supply of workers at that wage are employed by the government at that wage. This would eliminate the unemployment and yet maintain the higher wage. Thus at W1 below AB is the excess supply which should be taken on by the government which would sustain the higher wage and yet keep working poor happy.