Mega Assignment Analysis Of Supply And Demand And The Impact

Mega Assignmentan Analysis Of Supply And Demand And The Impact Of Gove

This assignment explores the principles of supply and demand and examines the impact of government intervention, specifically focusing on minimum wage policies. It addresses how increasing the minimum wage affects labor markets, potential unintended consequences, pricing dynamics, government spending on social welfare programs, and the global competitiveness of the United States.

First, understanding minimum wage as a price floor clarifies its effects on labor quantity demanded and supplied. An increase in minimum wage shifts the wage floor above the equilibrium point, resulting in a decrease in the quantity of labor demanded while increasing the quantity supplied. This creates a surplus of labor—unemployment. Using hypothetical numbers, if the original equilibrium wage is $7.25 with an equilibrium quantity of 100 units of labor, raising the minimum wage to $10.00 might reduce demand to 80 units while increasing supply to 120 units. The surplus, representing excess labor supply, is 40 units. This surplus signifies unemployment for low-skilled workers, who may find fewer job opportunities at higher wages (Mankiw, 2014).

Secondly, raising the minimum wage can have unintended consequences. It may incentivize low-skilled workers to invest in human capital—such as additional training or education—to improve their productivity and competitiveness. However, employers might respond by substituting labor with automation or technology, reducing the demand for low-skilled workers. For example, in retail, increased wages might lead firms to adopt automated checkout systems or online platforms, diminishing employment opportunities (Card & Krueger, 1994). This substitution effect can exacerbate unemployment among vulnerable populations and impede upward mobility (Neumark & Wascher, 2008).

Third, increasing minimum wages can influence the prices of goods and services produced by low-wage workers. As labor costs rise, firms may pass these costs onto consumers, leading to higher prices—cost-push inflation. For instance, fast-food restaurants may increase menu prices, which can reduce consumer purchasing power, especially for low-income households relying heavily on affordable options. The overall economic effect might be a decrease in consumer surplus, skewing income distribution and affecting economic growth (Mankiw, 2014). These price adjustments can have ripple effects on inflation and the affordability of essential goods.

Fourth, the impact on government spending is significant in light of employment changes resulting from minimum wage policies. Higher minimum wages can reduce poverty and dependence on social welfare programs. However, if unemployment rises due to increased costs for employers, more individuals may turn to government assistance such as welfare, food stamps, and unemployment benefits. Over time, this can lead to increased government expenditure, straining public resources. Conversely, the reduction in social welfare caseloads can result in cost savings, but only if employment remains stable. The net effect depends on the balance between these opposing forces, and empirical evidence suggests that moderate minimum wage increases may minimally affect overall government aid expenditures (Dube, 2019).

Lastly, at a macroeconomic level, the United States’ competitiveness in the global economy can be affected by higher labor costs stemming from increased minimum wages. Elevated wages may increase production costs, making American goods less competitive internationally, especially against countries with lower wage standards. Export-oriented industries could experience reduced demand overseas, leading to trade deficits and impacting the overall economic growth. Conversely, higher wages can boost domestic demand, fueling economic activity. The net effect hinges on the balance between increased consumer spending and reduced export competitiveness. Strategic government policies and technological innovation are crucial to maintaining a competitive edge amid such wage adjustments (Bivens & Zipperer, 2014).

References

• Bivens, J., & Zipperer, B. (2014). Raising the minimum wage to $10.10 could reduce poverty and boost the economy. Economic Policy Institute.
• Card, D., & Krueger, A. B. (1994). Minimum wages and employment: A case study of the fast-food industry in New Jersey and Pennsylvania. American Economic Review, 84(4), 772-793.
• Dube, A. (2019). Minimum wages and employment: A review of the evidence from low-wage markets. IZA World of Labor.
• Mankiw, N. G. (2014). Principles of Economics (7th ed.). Cengage Learning.
• Neumark, D., & Wascher, W. (2008). Minimum wages. MIT Press.