Minimum Wage Effects?

Question

How much capital will be invested due to an increase in the minimum wage? Will an increase lead to higher productivity? Are there studies available?

Answer 1

The effect of past minimum wage increases are so small compared to other factors that effect the economy that the only effects that can be measured is in teenage employment. Even in these studies the effects are mixed, with some even showing no change. In principle the production function would produce a substitution of capital for labor if the price of labor increases, but unless the wage increase were much larger than the one proposed the results could not been seen. There are only a couple of million workers workers who are paid the minimum wage and about 7 million that are paid less than the proposed new minimum out of a labor force of about 130 million. If on average they would get $1 hour increase for 2000 hours per year the total change would be $14 billion in a $13 trillion economy which is .1% or about 2 or 3 weeks GDP growth spread out over several years as the new wage is phased in.

Answer 2

Increases never lead to higher productivity. Grab any basic microeconomic textbook, and it will tell you that any increase in minimum wage above the market equilibrium for that particular job will only have a detrimental effect.

For instance an increase in mimimum wage will not directly effect those who are XML programmers because they are making far more then that anyway. But an increase in the wage of waitresses lets say who make say 5.15 before tips results in one of three possible outcomes 1. the restaurant has to lay off workers in order to maintain current profits (in the real world and not an idealistic one, companies are most definately in the business to make profit) 2. The company has to raise the price of their dinners to maintain current profit. This in turn after a series of causes and effects will cause the prices of goods in the entire market to rise in tandem 3. The company will decline in profits.

The third option rarely happens. The second happens most often

There is no increase in capital because whatever increase in capital occurs is offset by the equal rise in the price of goods.

Think about it like this. If you raise minimum wage to 20.00 an hour (which some people think would be a good idea) imagine what would happen to the prices of everything you buy. It would cost you a lot more to live your day to day life. And the real people hurt by this are the elderly who are living on their savings because now their money becomes worth less.

Answer 3

There will not be any new capital invested. There will actually be a decrease in the aggregate capital invested. Increasing the cost of production will lessen the amount income business entities will be able to produce. It will cost more to produce the product and if they leave the price alone, their margin will decrease. If they pass the price on to the consumer, demand will lessen (more or less due to the elasticity of the demand of the product). Either way, there will be less retained capital within the entity that will be used for investment in other ventures, new products, new equipment, new processes etc. There will also be less of those earnings going to the business owner to spend on other products. Furthermore, depending on how tight the margins of the business are, the business owner may have to lay off employees or even shut its doors if it is unable to maintain profitable operations.

To answer the second part of your question, no, productivity will not be increased. As stated earlier, aggregate demand will decline and the demand for more labor will decrease. If demand decreases at all, that means that production relative to capacity is going to decline. The further production falls from capacity, the more inefficient all factors of production become (land, labor, & capital)

Answer 4

My guess is no more than what is being done now or possibly somewhat less if more profits are being spent for labor.