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Federal minimum wage increases unemployment and should be eliminated
A Minimum wage is a price floor set in terms of wage rate in a bid by the government to give the lowest paid workers an income floor of earning a decent income. While minimum wages are set to protect workers, they end up hurting them because the wage rate floors lead to unemployment. The unemployment is caused by the increase in the cost of production as manufactures will be paying more for labor. As a result of the high cost of labor, employers will seek to pay less, by employing less. This is because the wage rate is increased, and increases the cost of hiring an employee, as shown in the graph below.
Wage rate
W SL
WMIN
We
SL
W
0 Q1 Qe Q2 Labor
The normal equilibrium wage rate of We, is set up by the forces of demand and supply. The two forces also determined at quantity of labor supplied at Qe which is a wage that can comfortably be cleared from the labor market. The imposition of a minimum rate, for instance, set at WMIN leads to excess supply of labor; because workers will be willing to work at the high pay, represented by Q2 – Q1. This will reflect the unemployment in the market, which makes minimum wages inappropriate interventions.
At the same time, setting a minimum wage by the federal government increases the cost of labor for the producers in the economy, compared cost of technology and capital (Mankiw, 2014). As a result, employers will shift to capital-intensive production and avoid labor-intensive production. This creates a scenario where human labor is rapidly replaced by machines, equipment and automated systems. This leads to loss of jobs, a situation that increases unemployment in the economy as the formerly employed the unemployed side. Therefore, federal minimum wage should be eliminated.
Reference
Mankiw, N. (2014). Principles of Economics. Stamford: Cengage Learning