Thursday, October 25, 2012

Bill Pushes for Increase in Wages

Written by Nariman T.

Article is written based on: <>

According to the topic where Jesse L. Jackson said that raising minimum wage would help to improve economy of United States. He has introduced a bill that would immediately increase the minimum wage by $2.75, from $7.25 to $10. That raising might encourage Americans to spend more, thus, help stimulate the nation’s struggling economy.

When wage rates are low, or when they fail to keep up with raising prices, employees may turn to government and lobby for a higher wage rate.

If government impose regulation that makes illegal to set wages lower than specified level ($10) in labor market, it is called minimum wage.

At the equilibrium price, the quantity demanded equals the quantity supplied. In a labor market, when the wage rate is at the equilibrium level, the quantity of labor supplied equals the quantity of labor demanded: there is neither a shortage of labor nor a surplus of labor. So when a minimum wage is set above the equilibrium wage, there is a surplus of labor. The demand for labor determines the level of employment, and the surplus of labor is unemployed. We can illustrate the standard analysis using a simple supply and demand model of the labor market.

Let's assume that the minimum wage rate in US is set at $10 an hour. Any rate below $10 an hour is illegal (in the gray-shaded illegal region). At the minimum wage of $10 per hour, 20 billion hours are hired but 22 million hours are available. Unemployment of 2 million hours a year is created. With only 20 million hours demanded, someone is willing to supply the 20 millionth hour for $4.

The minimum wage frustrates the market mechanism and results in unemployment and increase job search. At the quantity of labor employed, the marginal social benefit of labor exceed its margial social cost and a deadweight loss shrinks the firms' surplus and the workers' surplus.

Minimum wage laws are an example of a price control. Price controls limit the volume of transactions, and distort the quality of goods or services exchanged in the market place. In the case of a minimum wage, the costs are thought mainly to take the form of reduced employment and output, while the gains accrue mainly to those who keep their jobs at a higher wage rate.

Most economists believe that the aggregate losses accompanying price controls, including minimum wage laws, exceed the aggregate gains. Nevertheless, most democracies are characterised by political or quasi-judicial intervention into labour markets.

The demand for labour depends negatively on the real wage. Following an increase in the real wage, employers may alter their production processes to use less labour. If they cannot find less labour-intensive production techniques, their costs will rise and the demand for their output will decline. In either case, an increase in real wages paid to workers reduces the demand for their services.

An increase in output per hour that comes from higher productivity due to better equipment or methods is a good thing for the economy. An increase in output per worker that comes simply from working people longer and harder is not really an increase in productivity and is not beneficial to the economy.

The supply of labour depends positively on the real wage. As wage rates increase, workers are attracted to enter the workforce rather than continue education and training, work at home, work in their own businesses, or survive on the lower amounts of market goods and services they can buy using public or family "welfare" assistance.

From my point of view, this issue has two sides, the positive side is the increase in production, less unemployment, stronger buying power. Card and Kreuger say that increases in the minimum wage have increased teenage employment and decreased unemployment. The cruel irony of the minimum wage is that it harms most the very segments of our society that it is intended to help—the unskilled poor and the inexperienced young. Many believe that the minimum wage is hurtful to families at or below the poverty line. In order to benefit from higher minimum wage, a worker needs to have a job to begin with. When the minimum wage increases, many businesses let positions go in order to afford the rate hike. Workers that are laid off tend to be those without high school education, making it harder for them to find a new job.

Minimum wage increases cause employers to have fewer funds available to hire more workers, and in many cases, businesses will need to let workers go to cover the costs of the rate increase. Businesses may also choose to outsource jobs to find workers willing to perform the duties for less.

Another way businesses will seek to cover these costs is by passing the rate increase on to consumers. This means that if a business is forced to pay an employee a higher minimum wage, the business will then raise the price of their goods in order to afford the new wage cost.

Existing workers might also be willing to supply additional hours per week, or additional weeks of work per year, as the wage rate rises. For simplicity, the following discussion ignores any adjustment in hours worked in response to a minimum wage.

The intersection of the supply and demand curves determines an equilibrium real wage and equilibrium level of total hours of employment. If the prescribed legal minimum real wage is above the equilibrium market clearing level, the minimum is said to be binding. A minimum that is below the equilibrium market clearing level is non-binding and has no effect on the market equilibrium.

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