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

A 5% increase in the minimum wage would lead to higher earnings for some workers, potentially improving their quality of life. However, it would also cause a 5% reduction in employment, as employers reduce their workforce to compensate for increased labor costs. This reduction in employment negatively affects both workers who lose their jobs or have reduced hours and employers who face challenges in finding skilled workers and maintaining productivity. Whether this policy is considered good depends on various factors, such as the current economic situation, wealth distribution, and local cost of living.

Step-by-step solution

Calculate the percentage change in employment due to the increase in minimum wage

According to the given information, a 5% increase in the minimum wage causes a 5% reduction in employment. This means that for every percentage point increase in the minimum wage, there is an equal percentage point decrease in employment.

Analyze how the change in employment would affect employers

An increase in the minimum wage means that employers will have to pay their workers more for their services. This increased labor cost may lead businesses to reduce their workforce to compensate for the increased cost. The 5% reduction in employment signifies that businesses will have to either cut back on the total number of employees or reduce employees' working hours. Consequently, the employers may face difficulties finding new skilled workers and experience reduced productivity due to the smaller workforce.

Analyze how the increase in minimum wage would affect workers

Workers directly affected by the minimum wage increase will likely see an improvement in their earnings, which could lead to an increase in their quality of life. However, the 5% reduction in employment also means that some workers may lose their jobs or have reduced working hours. Those who become unemployed as a result of the policy may struggle to find new jobs as other employers also cut back on their workforce due to the increased cost.

Form an opinion on whether this policy would be considered a good one

In forming an opinion about the effectiveness of this policy, it is important to consider both its positive and negative consequences. On one hand, raising the minimum wage ensures that workers earn a higher income, which can improve their standard of living. On the other hand, the policy results in a decrease in overall employment, which can have negative consequences for both workers and employers. The effectiveness of the policy may also depend on the current economic situation, the distribution of wealth and income, and other factors such as the local cost of living. In conclusion, whether or not a 5% increase in minimum wage resulting in a 5% reduction in employment is a good policy would depend on various factors and the specific aims of the policy-makers.