Question

Suppose that a 5% increase in the minimum wage causes a 5% reduction in employment. How would this affect employers and how would it affect workers? In

your opinion, would this be a good policy?

Short answer

It would increase income & welfare of some workers, make some other workers unemployed. It is not a good policy, as it benefits some at the cost of others loss.

Step-by-step solution

Minimum Wage Concept 

Minimum Wage is analogous to wage floor, ie minimum mandated wage of labor services. It is usually set at binding level above equilibrium wage rate, to protect the survival status of workers.

It would lead to increase in wage rate, but decrease in the level of employment

Detail  Explanation & Recommendation 

Higher minimum wage leads - labor demand being less than labor supply, there is excess supply ie unemployment of labour.

It implies that : existing labor's wage increase - is at the cost of decreased welfare of labor that is unemployed.

• So, this is not recommended. Rather, increase in welfare can be done through - increase in government sponsored social security schemes of employers. It would benefit all employees, not benefit some & harm other.