Question

What is the extended effect of a minimum wage increase for a good that may be produced using labor, automation or some combination of the two?

Answer 1

If there is an increase in the minimum wage of a product that can be produced by any combination of labour or automation, the likely effect is to reduce employment in order to prevent the increase in the wage bill. In place of workers the company may start using more automation because it is given that automation and labour are substitutes.

It is also possible that the price of the product is increased in the market because there will be an increase in the cost of production which decreases the supply of the product. Those workers who were unemployed are mainly unskilled or semi skilled and therefore, they will be increasing the supply of unskilled workers, decreasing there wage rate.

The product manufactured by using unskilled workers is then likely to experience a decline in price when the supply is increased due to reduction in cost of production.