Question

Some advocates of the minimum wage argue that any decrease in the employment of the unskilled will be slight. They assert that an increase in the minimum wage will actually increase the total amount paid to unskilled workers (i.e., wage \(\times\) number of unskilled workers employed). Discuss what assumptions they are making about the wage elasticity of labor demand.

Short answer

The advocates assume that the demand for unskilled labor is wage inelastic, i.e., a change in wages will lead to a less than proportional change in the quantity of labor demanded. This stems from the belief that unskilled labor is not easily replaced, especially in industries that heavily depend on manual labor. The total amount paid to unskilled workers (wage times number of unskilled workers employed) would then increase despite a potential slight reduction in the number of workers, given the increase in individual wages.

Step-by-step solution

Understand the Concept of Wage Elasticity of Labor Demand

The wage elasticity of labor demand measures the responsiveness of employers to changes in wages. It is a measure of how much the quantity demanded of labor changes for a one percent change in wages. It is calculated as the percentage change in quantity demanded for a one percent change in price.

Make the Assumptions Clear

The proponents of the minimum wage assert that an increase in the wage will lead to an increase in the total amount paid to unskilled workers. This belief assumes that employers' demand for unskilled labor is inelastic, meaning that the percentage change in labor demand would be less than the percentage change in wages. Hence, even if there were a decrease in demand, the total income (equal to number of workers multiplied by their wages) would still rise due to the increased wage rate.

Explain the Logic Behind the Assumption

This assumption is borne out of the idea that employers may not significantly reduce their unskilled labor intake despite an increase in minimum wages because unskilled labor may not easily be replaced. This is particularly true in industries that rely heavily on manual labor. Hence, in such cases, the demand for unskilled labor may essentially remain unchanged, or decrease slightly, despite an increase in minimum wages.