Impact of Minimum Wage on Unemployment

Running head: Impact of Minimum Wage on Unemployment
Impact of Minimum Wage on Unemployment
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Impact of Minimum Wage on Unemployment1
Introduction
Factor of production is key to the any sector and growth of a sector depends on its type
and price of factor of production. The higher the price of factors, higher will be the cost of
production. With increased cost of production, the profitability of a firm decreases given the
price of product. Labor is one of the key factor of production for every sector and the price of
labour that the firms pay is called wage. Like in the case for products, the supply and demand for
labour is also decided in the market known as labour market, equilibrium of which is determined
by the supply, demand and price of labour. However, wage has large impact on the life of the
labours as it is the income for them and the standard of living and affordability depends on it.
Thus, if wage of a labour does not increase his standard of living would not improve. In most of
the countries in the world the government sets a minimum wage such that no labour get exploited
and can lead a life with all the basic amenities. On the other hand, wage is a cost for firms and
thus any change in would impact the operation and decision of firms and their demand for labour
which will further impacts the unemployment rate. Thus, this essay studies the impact of
minimum wage on unemployment by studying various aspects of economic theory related to the
concerned topic.
Economics of minimum wage
Labour is a part of factors of production for a firm and it is obvious that firms want to
minimize their cost from every aspect in order to increase market share by improving
competitiveness and sales revenue (Becker 2017). This would lead to the rise in profitability of
the firms. Alternatively, labour wage is income for the workers using which they pay their bills.
It is known that more income means increased affordability and better standard of living. Thus,
the workers always want more wage so that they can spend more and have a better life. In

Impact of Minimum Wage on Unemployment2
today’s world the number of jobs available is lower than the number of workers available for
work. Thus, there is an excess supply of labours in the market. Considering, the other factors as
given the wage of labour would tend to fall due to the reason of excess supply (Joll et al. 2018).
Additionally, due to unavailability of sufficient amount of jobs the workers tend to agree with the
sum of wage offered by the employers. Thus, it has been observed that in any case the workers
are paid less than what they deserve and in many case the low wage affects the worker in adverse
ways causing to achieve basic standard of living. With an objective of mitigating this problem
the government imposes minimum wage (Meer and West 2016). It means that the employers
cannot pay an employee lower than the amount of wage set by the government as minimum and
protects it by passing minimum wage law (Harasztosi and Lindner 2019). Thus, violation of
minimum wage law by the employer attracts penalty in various form. Therefore, by this
regulation government increases the amount of wage of the workers and thereby their standard of
living. It is argued by many that due to rise in wage rate more people will be interested to work
more and thus the employment of the society will increase.
Owing to this minimum wage set by the government there will be rise in average wage of
the workers and thus the supply of labour force increase in order to achieve more income. On the
other hand, due to rise in wage the cost of production for the firms or employers will increase
and it will have a direct impact on the price of the products and profitability of the firms
(Brosnan 2019). Increasing price of products would be bad idea as it would lead to fall in
demand for the products. Thus, if the firms keep the price same even after the increase in cost of
production the profitability of the firms may fall and in many cases firms may fail to achieve
breakeven point and lead to shut down (Kampf, Majerčák and Švagr 2016). Hence, most likely
the firms would increase in the price to survive in the market but fall in demand for product will