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Applied Economics Spring Formative Essay (Got 66%)
Explain why the relationship between minimum wages and employment was
recently described as elusive.
The relationship between minimum wages and employment has recently been
questioned on if there actually is a positive or negative relationship between them or
if there is no relationship at all. Stewart (2004) supports the idea that the relationship
between minimum wages and employment is elusive. In his study, they used three
different UK data sets to estimate the probability of employment among workers
whose wages had been raised to comply with the minimum wage. The results
showed no significant adverse employment effects in any of the four demographic
groups considered nor in any of the three datasets used. At the moment, the UK are
increasing the minimum wage on a much larger scale, this is because the minimum
wage seems to not have much of an effect whatsoever on employment and has a
positive impact on productivity and increasing the minimum wage reduces poverty
and inequality. However, the literature on this relationship is very varied in results, so
we cannot rule out there being any relationship at all.
There is a lot of theory in Neoclassical Economics to support the fact that there may
be a positive relationship between minimum wages and employment. This theory
closely relates minimum wage employers to non-discriminatory monopsonies. A
good example of this is the fast-food restaurant industry, this is because these
restaurants are homogenous and pay only the wage to their workers and usually no
tips on a general scale. Using the neoclassical diagrams of a non-discriminating
monopsonist before and after the introduction of the minimum wage, we can explore
the theoretical relationship before comparing this with empirical findings. The
following diagram shows a non-discriminatory monopsonist before the introduction of
the minimum wage:
The non-discriminating monopsonist pays the same wage to all workers. The
marginal cost of hiring exceeds the wage, and the marginal cost curve lies above the
labour supply curve. Profit maximization occurs at point A; the monopsonist hires E M
workers and pays them all a wage of wM, Borjas (2016). The diagram below shows
what happens after the minimum wage is introduced:
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