It focuses on the economy in the short run instead of waiting and letting the economy self correct. For example, Keynesian economics counters the idea that lower wages can restore full employment. They are arguing that employers will not add employees to produce goods that cannot be sold because demand is low. Similarly, poor business conditions may cause companies to lower their capital investment, instead of taking advantage of lower prices to invest in new technology or capital. This would also have the effect of reducing overall employment.
Anti- supporters believe an increase in the minimum wage will negatively affect the economy. Both sides of the debate will be explored in this paper. For those who argue against raising the minimum wage, their main argument is based around the fact that it will cause unemployment, or decrease employment. Businesses will have to start cutting the hours of employees in order to stay profitable. They will also need to raise their product prices to continue profitability.
It is highly likely that there will be disincentive effect, discouraging the workers from working hard (Economics Help). Since the workers are aware of the fact that a huge proportion of their income will be taken away anyway, there will be less incentive for them to work hard. Also, such progressive tax can discourage the poor from struggling to climb the ladder. The mere fact that they will be provided with insurance and protection from the government will eliminate the need to get out of their current status. Nonetheless, other economists argue that the disincentive effect is highly unlikely to occur.
When workers see that their wages have risen, they supply more labor, leading to a lower unemployment rate. Workers may not realize immediately that their purchasing power has fallen due to quickly rising prices, but over time, their expectations and understanding changes and they begin to supply less labor, thus resulting in the natural rate of unemployment and high inflation. Phelps illustrates this phenomenon in his expectations-augmented Phillips Curve. His contributions have better explained the relationship between unemployment
According to them, the lower cost of production will eventually lead to a decrease in the price of the product, thus the increased demand derived from this will result in higher profit that could be invested in employee benefits. However, a study by McKinsey found that two thirds of those economic benefits spill back to the United States (Schroedder and Aepeal, 2003) Besides, offshoring can create jobs in a developing country, building a strong economic base, increase domestic consumption and encourage imports from developed countries such as the USA. Moreover, offshoring helps companies concentrate on their core business area and skilled manpower at an affordable price. Countries like India benefit from this kind of outsourcing creating employment for highly qualified personnel, making it the center of software development services industry. However, there are also negative views on offshoring.
Minimum wage has gained an important place in the brain of politicians to reduce social gaps and inequality. Governments intervene on the market to allocate a better wage towards workers than the one offer by the market equilibrium. This controversial measure raises lots of debate on whether raising the minimum wage results in workers becoming jobless. Government intervention on minimum wage has one main goals: increase the demand by an increasing of wage. The main reason against minimum wage is that it creates unemployment among low skilled workers; on top of that it can be argued that the redistribution effect is not going to the target people of the measure.
In his opinion, state should increase the aggregate demand by applying some fiscal and monetary policies. Decline in demand will naturally reduce the flow of resources to service and production of goods, which may damage employment and increase inflation. Natural changes in the prices, wages and interest rates cannot solve the problems in the short run, then the harms which is occurred in the short run can give a rise to bigger devastation in the long run. Keynes clarified his pessimism for the future with these sentence ‘’In the long run, we are all dead’’ According to Keynes, the reasons of recession and unemployment are occasionally the measures that people take to avoid them. If households want to save more than firms ' investment desires, output and employment levels in the economy will decrease.
This cost will then be absorbed by firms or more likely be passed on to consumers in the form of higher prices. This is an example of cost-push inflation. Such inflation erodes income gains associated with minimum wages, while causing aggregate demand levels in the economy to decline (DPRU, 2008). Shadow labour markets may develop Since minimum price is set above market clearing prices, shadow markets are likely to develop. This is because at the minimum price there is a surplus of labour.
Many people will try to state the fact that employers will simply pay an extremely low rate, but this is simply not the case. The reason we are able to infer this is due to the principle of supply and demand. With such large economic growth, there will immediately be a demand for labor. Whenever you have a high demand for an item, you will see an increase in price and a decrease in abundance. As the competition for labor increases, the laborers will end up with better wages then they had to begin.
With higher production costs and productivity at it maximum, companies cannot maintain profits by producing the same amounts of goods and services. As a consequence, the increased costs are passed on to customers, causing a rise in the overall price level (inflation). Demand-pull inflation occurs when there is an increase in collective demand, categorized by the four sections of the macro economy: governments, households, businesses and foreign buyers. When these four sectors at the same time want to purchase more output than suppliers can produce, buyers compete to acquire limited amounts of goods and services. Buyers then bid prices up, again and again, causing inflation.