Minimum Wage Effect

MinimumWage Effect

Sometimes,especially when politicians are campaigning, they tend to makepromises so as to win the hearts of the majority of the society.These promises have to be kept at times enable the politicians to getelected. However, when some of these promises become implemented,they seem unreasonable and impractical in the economic world. Anexample of the unreasonable promises made by politicians to thepublic is an increase of minimum wage in every state. Theimplementation of such a promise has various impacts on supply,demand, and the labor market equilibrium.

Belowis a graph illustrating the effect of imposing a price floor of $15on the supply, demand and labor market equilibrium:


P-Cost of production




D S1




S1 D



Q1 Q

Payingmore to the employees is going to lead to an increase in the cost ofproduction. It will result in the firms in Altoona Penn having to layoff some of their employees for them to be able to work within theirbudget of the production. The demand for jobs will, therefore,increase with the increase in the quantity of people left jobless inthe market. The graph shows that the supply of work will go inwardswhich are also descriptions of the minimal availability of jobs. Allthese effects are going to be leading up to the market readjustingitself.

First,the demand for goods might go low as a result of the increase inprices. A mentioned earlier, prices are going to increase due to anincrease in the cost of production. Therefore, the supply or quantityprovided by the firms is going to lead to supply exceeding the demandin the market (Holzer, 2). When people in the market cannot affordthe goods that are sold by the companies at high prices, thecompanies will be forced to lay off some of their employees. In mostcases, it is the low performing employees or the averagely performingemployees who will be left jobless.

Oncethe firms have laid off employees, there will be a shift in the labormarket equilibrium concerning high unemployment. Companies willprefer hiring people with more experience and deny the young adultsopportunities to gain skills in working in their firm. The firms arenot going to be willing to pay a high amount for sub-standard skillsfrom its employee (David,Manning and Smith 58).Also, minimum wages being set by the government might also lead tothe low paying businesses closing down. It further saturates thelabor market with unemployed people hence further negativelyaffecting the economy.

Inconclusion, should the government of Altoona Penn decide to set theminimum wage at $15, it would lead to a sequence of negative impactson the economy from an increase in prices to major unemployment inthe state. High rates of unemployment come with greater risks such asthefts and insecurity which in turn discourages foreign investorsinto the economy. There will be less circulation of money in theeconomy. This is because even though the pay will be higher for thoseemployed, few people will have money as most of them will beunemployed. It goes to show that politicians need to be morereasonable when making promises to people in the society and ensurethat they do not negatively impact the economy.


David,H., Alan Manning, and Christopher L. Smith. &quotThe contribution ofthe minimum wage to US wage inequality over three decades: areassessment.&quot AmericanEconomic Journal: Applied Economics8.1 (2016): 58-99.

Holzer,Harry J. &quotA $15-hour minimum wage could harm America’s poorestworkers.&quot&nbspBrookingsInstitution. July&nbsp30(2015). 2