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Impact Of Increasing Minimum Wage On The Economy

1271 words - 6 pages

Impact of increasing minimum wage on the economy
Earlier in 2014, Deval Patrick, the governor of Massachusetts signed a legislation which stated that the minimum wage in Massachusetts would increase from the current $8 per hour to $11 per hour over the next 3 years. To many people, an increase in the minimum wage may sound beneficial as many positive connotations such as reducing poverty are commonly associated with an increased minimum wage. However this isn’t the case from an economic perspective. From an economics perspective, an increase in the minimum wage can have both positive and negative long and short run effects on the minimum wage workers, and the economy as a whole.
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In addition, some firms may have to resort to laying off employees as they may not be able to afford the same amount of labor as they were able to before the minimum wage was increased. As a result, firms who have had to lay off workers to maintain an acceptable level of profit will see a decrease in their overall productivity and efficiency as they may not be able to hire enough workers to reach the optimal level of production, and workers who were laid off are now worse off than they were before the minimum wage was introduced. Additionally, because higher skilled workers are a close and potentially better substitute to minimum wage workers, firms may choose instead to employ higher skilled workers instead of minimum wage workers. Because the price of low skill workers have increased, the demand for the substitute good (high skilled labor) will also increase, which will cause the price of high skilled labor to also increase.

Another way in which an increased minimum wage will negatively affect the economy is that the economy can experience higher prices. This is because firms that incur higher labor costs will have to increase their profits to break even. As a result, firms will increase the prices of their goods and services to account for the increased labor costs. This tends to have a ripple effect as many other firms and companies will follow this method and increase the price of their goods and services. This will then lead to an overall increase in the price level of goods and services in the economy. An increase in the overall price level not only lowers the purchasing power of households. This has the potential to start a vicious cycle and lead to another increase in the minimum wage to match the higher price level. What this means is that consumers will have to pay higher prices for goods and services due to the higher price level, and the extra money earned by minimum wage earners will not have much of an effect on the quantity of goods and services they will be able to purchase as the amount of goods and services that a single unit of currency can purchase has decreased. This is harmful to minimum wage workers as they will not be able to purchase more goods and services even after a higher minimum wage is imposed. Consumers in general will also be worse off as they will have to face a higher overall price level for goods and services.
Another benefit of increasing the minimum wage is that it will decrease the turnover rate. This is because in a labor market that is competitive and selective, workers will place a higher value on their jobs and because they are being paid higher wages, they will feel more...

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