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  • Posted By: joycehsia
  • Date Posted: 04/17/2011
  • Category: Social Issues
  • Words: 1313
  • Pages: 6
  • Views: 1027
  • Rank: 69

Effects of Changes in Minimum Wage

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Effects of Changes in Minimum Wage

The Fair Labor Standards Act enacted in 1938 was the first legislation adopted at the national level in the United States aiming to protect labor rights. Among its provisions was the minimum wage rate, which set a minimum hourly wage rate that could not be reduced. The federal minimum wage increased from $5.15 to $5.85 in July 2007, then to $6.55 in July 2008 and to $7.25 in July 2009. Meanwhile, the California state minimum wage has remained constant at $8.00. In the same period, national teen employment rates declined, as they have since 2001. Such increase in minimum wage will have different effects under different models of labor demand. In this essay, I will discuss the predictions of minimum wage effects on employment that follow from each of the three main models of labor demand, which are the standard competitive model, the monopsony model, and the efficiency wage model. Moreover, I will discuss the correlation between such increase in minimum wage and the teen employment rate in the United States.

If a firm is operating in a purely competitive product market, it will have many competitors selling the same products thus it will have no control over its product price. In a competitive market, given any real wage that is set by the market, a firm will employ labor to a point where the marginal product of labor is equal to the real wage. In the short run, the profit-maximizing firm will operate in a way that labor’s marginal revenue product equals to the wage rate. However, in the long run, in order to maximize profits, a firm will need to adjust its labor as well as its capital inputs so that the marginal cost of producing one extra unit of output using labor is equal to the marginal ...

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