Question

The standard supply and demand model of the labor market implies that an increase in the minimum wage should increase unemployment by widening the gap between the quantity of labor supplied and the quantity of labor demanded. To date, however, studies of the employment effects of increases in the minimum wage have mostly found little or no such effects.

What are some plausible reasons why increases in the minimum wage may not have strong negative employment effects?
A.The law of supply and demand doesn't apply to the labor market.
B.Higher wages increase workers' purchasing power, creating higher demand for goods and services, which in turn necessitates hiring more workers.
C.Higher wages may make jobs more valuable to employees, lowering turnover costs for firms.
D.The wages of low-wage workers are a small portion of firms' overall costs, so the employment effects of changes in these wages may be small.

Answer 1

Increases in minimum wage may not impact employment significantly due to price adjustment, increased purchasing power leading to higher demand for labor, improved worker productivity, and historical precedence of setting minimum wages close to equilibrium.

Step-by-step explanation:

The question explores why increases in the minimum wage may not lead to strong negative employment effects, despite the predictions of the standard supply and demand model of the labor market. There are several plausible reasons for this. First, higher minimum wages could lead to increased prices for goods and services, essentially passing the cost on to the consumer without a significant impact on employment levels. Second, higher wages boost employees' purchasing power, potentially leading to an increase in the demand for goods and services, which could require more labor to meet this demand. Third, increased wages could improve worker productivity and reduce employee turnover, offsetting the cost of higher wages to employers. Lastly, when minimum wages are set near equilibrium, they might not impact employment substantially, as seen historically in the U.S.