Candidate Name Jigeesha Banka
Teacher Ms. Duggan
Title of the Article Local lawmakers, business owners
oppose minimum wage
Source of the Article Herald-Standard
Date article was published February 11 2019
Date the commentary was written March 2 2019
Word Count (750 words maximum) 749
Section 1: Microeconomics
Section of the syllabus the article relates Section 2: Macroeconomics
to (please mark the one that is most
relevant) Section 3: International Economics
Section 4: Development Economics
Minimum wage refers to a minimum price of labour set by governments, in order
to ensure that low-skilled workers can earn an adequate wage which allows them to
access basic goods and services. But some argue, increase in minimum wage may
prove to be “damaging to small businesses” as it raises the cost of production, defined
as the total opportunity costs incurred by firms in order to acquire resources for use in
production. This forces firms to layoff workers and reduce output, since they are not
earning the same amount of profit they did before, and according to the concept of
welfare maximization producers are always seeking to maximise profit. This also
adversely affects the workers as there is now an increase in unemployment. This
concept of increased unemployment is
illustrated in Fig 1, where the initial
minimum wage, Pm1, is fixed at a point
of disequilibrium causing the quantity of
labour supplied, Qs, to be larger than
the quantity of labour demanded, Qd,
which results in unemployment.
Comparatively, the increased minimum
wage, Pm2, results in an even bigger quantity of labour supplied, Qs*, and an even
smaller quantity of labour demanded, Qd*, making the labour surplus even larger,
represented graphically as surplus.* Another concern small-businesses share is that the
increased minimum wage puts them “above neighbouring states, making it harder to
compete,” causing businesses to leave the market due to their inability to compete with
producers who have lower prices for their goods because they don’t have an increased
cost of production. This means, for suppliers in Pennsylvania the supply curve shifts to
the left which causes their market price to be higher than their neighbouring states as
the neighbouring states supply did not decrease. The equilibrium price is higher in
Pennsylvania because with the decreased supply, at the initial price there has been a
move from equilibrium to disequilibrium, where there is now excess demand. This
causes price to increase until it reaches a point where the shortage has been
eliminated, and there is a higher equilibrium price and lower quantity supplied.
A rise in minimum wage harms producer and consumers and has a mixed effect
on society as a whole and workers. Firms now face a higher cost of production due to
higher labour costs, causing them to raise the price of their products which incentivizes
consumers to buy less of the product, as they now have less utility due to the increased
price, causing the producers to suffer loss as the amount of money they are spending
for production is greater than their
revenue. This is reflected in Fig 2, by the
leftward shift of the supply curve from S1
to S2. On the initial equilibrium point, e1,
the price was lower $7.99, and the initial
equilibrium quantity was higher. But after
the shift, the market disequilibrated at the
initial price of $7.99, represented by point
a, causing a shortage. This increased the price to $15.99 where the shortage had been
eliminated. The new equilibrium point,e2, had a higher equilibrium price and a lower
equilibrium quantity, which shows that as the price rose consumer desire for the product
fell, thus incentivizing firms to reduce output. The reduced amount of output also
indicates that producers will be firing more workers as the firm's quantity of production
has decreased, and the increase in labour wage is not very profitable for firms, thus
workers are also worse off. However, there is also a group of workers who will benefit,
as some workers will be able to keep their jobs and enjoy a higher income than before.
These workers will now have a better standard of living and be able to afford goods and
services they could not before.
Consumers are at a disadvantage because “the increase would be a cost burden
shouldered by the consumers through higher prices for goods and services.” Shown in
Fig 2 where the increased production costs leads to a decrease in supply which leads to
higher prices and lower quantities of the good. However, the increased minimum wage
allows “tens of thousands of people to work their way off of public assistance.” As a
result of this, these workers are no longer entitled to government aid as they are now
above the poverty line, allowing government
exchequer to be spent on other important society
requirements; which benefits society. However,
the society also gains some disadvantage
because the increase in minimum wage causes
the negative welfare impacts to increase, since
there is an underallocation of labour resources
relative to the social optimum as shown in Fig 3, where Qd* is less than Qe.
Additionally, the increase in deadweight loss is illustrated by the blue shaded region at
Pm1, initial minimum wage, and the blue plus red shaded region as the price floor
increases to Pm2. Lastly, increase in minimum wage harms producers through loss of
profit, consumers through loss of utility, workers through increased unemployment and
society through increased welfare loss; this shows that almost every stakeholder is
worse off because of the increase in labour wage.
