Question

The debate on the effects of raising the minimum wage is ongoing. A few years ago, Seattle, Los Angeles, and San Francisco passed laws to gradually raise the minimum wage to $15/hour. Beaudry, Paul, David A. Green, and Ben M. Sand (investigated the possible effects of these laws on the labor market and concluded that "...for workers below $10 per hour in Seattle, the employment rate declines by over 10 percent in response to raising the minimum wage to $15. Meanwhile, for the larger group with wages at or below $15, the decline is approximately 7 percent." The authors' conclusion is consistent with the specific economic theory discussed in the course that

Answer 1

The study indicating a decline in employment after raising the minimum wage to $15/hour illustrates the economic theory concerning price floors. As the minimum wage increases significantly above equilibrium, it is expected to lead to a rise in unemployment due to the creation of an excess supply of labor.

Step-by-step explanation:

The conclusion derived from the study conducted in cities like Seattle, which observed a decline in employment after raising the minimum wage to $15, aligns with classic economic theory regarding price floors. When the minimum wage is set below the equilibrium for low-skill labor, it typically does not disrupt employment levels significantly. However, a significant increase in the minimum wage, as seen with the $15/hour rate in some U.S. cities, can lead to a reduction in the quantity demanded of labor—a core prediction of economic theory. This happens because employers may not be willing to hire the same amount of labor at a higher wage or may substitute labor with technology or other cost-saving measures.

In areas where the minimum wage has been increased significantly above the equilibrium wage of low-skilled labor, the economic theory would predict a greater effect on reducing employment, which is what Beaudry, Paul, David A. Green, and Ben M. Sand have found in their research. The stark increase acts as a price floor that could lead to a higher quantity of labor supplied than demanded, resulting in an employment decline of 10 percent for workers below $10 an hour and approximately 7 percent for workers at or below $15.