Question

Does minimum wage cause unemployment?

The minimum wage has evoked controversy since its passage as part of the Fair Labor Standards Act of 1938. Proponents of the minimum wage argue that a higher minimum wage will help create jobs, grow the economy, help the war on poverty, and will reduce wage inequality. Its critics stress that the minimum wage causes unemployment, hurts the economy, and actually harms the low-income people that were supposed to be helped.

These are clearly very divergent viewpoints. Part of the disagreement simply reflects normativedifference of opinion. Thus, it is perfectly respectable for two people to agree on the positiveconsequences of increasing the minimum wage but to disagree on the normative questions of whether it should be increased. Unfortunately, there is still quite a bit of disagreements even among economists concerning the answer to the following seemingly straightforward positive question: What are the employment effect of raising the minimum wage?

The main purpose of this assignment is for you to carefully consider the impact of increasing the minimum wage, focusing on the positive rather than normative analysis.

In your analysis you should apply the models, tools and techniques develop in this class. Your analysis should start first with a brief explanation of the problem and its complexities. You should explain the effects of the minimum wage laws in perfectly competitive markets. Next, you should compare the size of unemployment when the labor supply and demand are very elastic with the results predicted when the two curves are very inelastic. In addition, what happens when the minimum wage is increased in a monopsonistic labor market? You should carefully define all terms and concept and include all necessary graphs that will help you explain your points more clearly. Make sure that you properly label all graphs, figures, and tables and appropriately refer to them in the text.

Given that the effects of the minimum wage on employment differ based on the assumptions made about labor supply and demand (elastic vs. inelastic) and the structure of the labor market (perfectly competitive vs monopsonistic) how can economist then try to find the answer this question?

Carefully explain what methods economists could use to explore this social issue. Evaluate the empirical evidence and data and write your own interpretive analysis.

HINT: Can you think of few reasons why an increase in minimum wage would not lead to an increase in unemployment (besides the arguments you made under monopsony)? Can you think of few reasons that the unemployment would go up, even if the minimum wage stays the same? How do the answers to these questions impact the reliability of empirical data?

Answer 1