Minimum Wage

This article discusses the key economic principles related to minimum wage, cost of living, inflation, and business costs. It presents two contrasting views on whether minimum wage should be increased or not, considering factors such as the cost of living and inflation. The article also highlights the potential impact of minimum wage adjustments on businesses and the labor market.

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“1. Please discuss the following excerpt from a recent news article in The Guardian.
Highlight the key economic principles that are in the article.”
This excerpt gives views on the P.E.I’s minimum wage which is about to be reviewed by the
provincial government. Two controversial views arise on whether the minimum wages should be
increased or not.
The view by Mary Boyd with the group “P.E.I Coalition for a Poverty Reduction Strategy” feels
that minimum wages which currently stand at $10 per hour should rise. The argument behind this
statement is that, even though minimum wages have been rising rapidly for the past years, the
coupled costs of living have been left unconsidered despite the fact that they have also been
increasing rapidly. According to Boyd, considering the current high cost of living, the minimum
wage should definitely be increased above $10 per hour.
The view by Erin McGrath-Gaudet of the “Canadian Federation of Independent Business” feels
that minimum wage should not be increased considering inflation level. Despite minimum wages
having been increased for the past years, inflation has not been considered. Minimum wages
have outpaced inflation level and hence businesses have faced difficulties in adjusting to
minimum wages costs. Therefore, this view suggests that minimum wages be considerate of the
prevailing inflation level.
The key economic principles which have been highlighted from the excerpt include the
minimum wages versus the cost of living, inflation and business costs of production. Minimum
wages should be adjusted in accordance with the costs of living and inflation level. If minimum
wages outpace inflation level, businesses would face an increase in costs of production. As a

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result, businesses may cut their production level and lay off some workers and this will definitely
increase unemployment (Addison, Blackburn and Cotti 2013, p.30). The aggregate supply curve
in the economy, as a result, will shift towards the left direction from AS0 to AS1. The quantity
supplied will decrease from Q0 to Q1 whilst market prices will rise from P0 to P1 causing inflation
as illustrated in the below diagram.
Also, an increase in minimum wage above the equilibrium point which considers both the cost of
living and inflation would lead to excess labor supply and a decline in labor demand (Elwell,
2013) as illustrated below. From the diagram, when the minimum wage is raised from the
equilibrium point (MW0, Q0) to MW1, the cost of production for businesses increases and hence
they decrease their demand for labor from Q0 to Q1. As a result, the labor market faces an excess
labor supply of (Q2 – Q0) as illustrated.

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References
Addison, J.T., Blackburn, M.L. and Cotti, C.D., 2013. Minimum wage increases in a
recessionary environment. Labour Economics, 23, pp.30-39.
Elwell, C.K., 2013. Inflation and the real minimum wage: A fact sheet.