Question

The following policies have at times been advocated for coping with unemployment, explain how minimum wage could work?

Answer 1

Minimum-wage laws set a legal minimum on the wages that firms pay their employees. Minimum wages laws make wages rigid, when they prevent the wages from falling to the equilibrium levels more often during the recession.

While the proponents of minimum wages argue that such laws ensure minimum respectable standard of living for the workers, opponents argue that such laws further deteriorate the economic situation during recession by not allowing the wages to adjust to the new economic reality. This affects the new entrants in the labour market the most.

During the recession, the rising labour cost due to minimum wage laws causes the labour cost faced by firms to rise. So, in order to cope with unemployment, it is considered ideal to either do away with minimum wages or to keep them below the equilibrium level.