Econ script
The minimum amount of money or wage that an employer is required to pay the workers for
the work performed during a given period. This cannot be reduced by individual contract.
The French president Emmanuel macron recently announced an increase of 100 euros for
minimum wages after the protests in France.
This increase in the minimum wages mean that the cost of production for the firms has
increased and they might increase the price of the products they are selling.
Unlike the common government price flooring on the commercial goods, increasing the
minimum wage is quite different case.
In France, the government increased the wage to reduce the intensity of the protests around
the nation and to work on the income reallocation. The government also aims to improve the
quality of life in the country.
Minimum wage is a type of minimum price control (price flooring)
This is a situation where the government sets a minimum price, above the equilibrium
price, which then prevents producers from reducing the price below it.
Increase in minimum wage means the increase in overall income for the workers. This would
lead to more expenditure, and consumer demand on normal goods would increase, shifting
from the inferior goods.
The other part is that since more people have more income, they are going to spend it, more
going out to eat, more cloths, more movies etc. This is why the increase in minimum wage will
be on the lower end of the scale, because while it’s more expensive to hire the workforce, firm
owners are also going to get a good jump in business. (counter)
Despite the graph we use for minimum price control, we can think of this way. Let this be the
price or the cost of employment and the x-axis be the quantity of jobs demanded and supplied
to workers.
The increase in cost would lead to the excess demand for the jobs and this has to come down
by increase in the supply.
However, this is limited within the ability of firms to employ large amount of people. Hence,
the government must create jobs for the unemployed workers due to shortage in jobs.
For example, say apple. iPhone 8+ production cost in total from base material to delivered
phone in a box at the apple store is about 300$ per unit.
They sell for $800+ a unit, so 500$ profit after shipping. Even if the firm take 100$ off that
for marketing, still looking at 400$ profit.
They could hire a bunch of factory workers in the states and they would still make around
250-300$ profit per phone, but they won't because of greed.
We need more regulation to fix this issue. It is probably going to require a tax rework, heavy
import taxes and penalties for companies who make the majority of their goods overseas.
Short term effects of increase in minimum wage are increase in cost of production and increase
in price. When government sets up the minimum price control on commercial goods, it is a
benefit for the firms. However, the increase in the minimum wage is a total opposite. The
business makers struggle because the cost of production increases. As a result, they have to
increase the price of the products they are selling in order to get back to initial profit level.
Long term effects are unemployment and increase in automation and creation of black market.
The increase in minimum wage encourages the firm owners to reduce their human workforces.
In fact, eventually, non-human capitals such as self-checkout counters would be introduced to
many shops. (automation)
Moreover, the inflation increase rate should be caught up by the minimum wage. If this is not
done, then, the gap between the poor and the rich would get even bigger.
The only real victim here is the small business that is just scraping by right now, these people
will probably have to close and while that is sad, if they haven't turned decent profit within the
first 2-3 years their chances of closing are extremely high anyway.
Example
If the current wage is 7.25$ an hour and government raises to 15%, which is 7.75$ increase.
According to the source, one-time increase in minimum wage brings about 2 to 7% of increase
in price. Say the meal costs you 10$, than the price would go up based on the increase in
minimum, in this case, it’s around 20 to 70 cents.
“By looking at changes in restaurant food pricing during the period of 1978–2015, MacDonald
and Nilsson find that prices rose by just 0.36 percent for every 10 percent increase in the
minimum wage, which is only about half the size reported in previous studies. They also
observe that small minimum wage increases do not lead to higher prices and may actually
reduce prices. Furthermore, it is also possible that small minimum wage increases could lead
to increased employment in low-wage labor markets.”