Answer To: Write an essay, answering the following question: 1. Unemployment . Discuss the arguments by...
Komalavalli answered on Jul 25 2022
Minimum wage and Unemployment
Table of Contents
The traditional notion of the minimum wage and unemployment: 2
Keynesian view 3
Modern view of minimum wage and unemployment 4
The traditional notion of the minimum wage and unemployment:
In classical unemployment theory, the labour market is seen as a single, static market with spot transactions, perfect competition and dual auction institutions. In this case, the employment offers work while the employer requires it. The number of people working full-time in a certain period, for example, might be used to assess the amount of labor provided. Labor, on the other hand, is measured in terms of daily earnings. The idea presumes that all work units are equal and that all workers in the labor market are paid the same rate. Furthermore, according to classical theory, unemployment is a transitory situation, and the action of free market forces will ensure that the economy recovers to full employment, given flexible wages and perfect information.
Figure 1 depicts a situation in which the flexible wage assumption does not apply, and hence the labour market is not changed. The equilibrium pay is W E in Figure 1, and the equilibrium amount of labour provided and required is L E. According to classical theory, if companies are required to pay a minimum wage of, say, W* (as illustrated in Figure 1), this price will be significantly higher than the equilibrium wage. In this scenario, the demand for minimum-wage work is LD, and the supply of labor is LS. There is a surplus of employees because the amount of labor given exceeds the amount of work requested at the minimum payment. This is represented in so-called classic voluntary unemployment.
Keynesian view :
Keynesianism's basic idea is that prices are sticky, and that sticky labour prices induce unemployment. As a result, we argue that fiscal policy, or fiscal stimulus, is an appropriate response to a recession. It's incredibly basic, but if we accept it, then a mw does the same thing. As a result, the minimum wage should raise unemployment. As a result, something negative happens to the economy. It might be either a supply or demand shock. Great, earlier Classical economics just assumes that all prices adjust to account for this, and the economy continues to function. Yes, everyone is poorer, and wages have fallen, but after adapting to the shock, we rapidly return to full employment and growth, simply because prices react quickly.
That, according to Keynes and the Keynesians, is not how it works. People are delusory about money. We will let our actual salaries to shrink, even if inflation, for example, outpaces pay increases. But when our nominal salaries fall, we become quite dissatisfied. Wages will not fall to the new levels needed by our shock in a recession, when there will be little or no inflation. Simply, because we are adamantly opposed to declining nominal wages. That is why all interventions are required. Because prices do not change rapidly, we might wind up languishing in a recession for years.
Of course, prices can be considered to react very fast, even immediately. However, you are no longer a Keynesian; rather, you are a new classic, or perhaps a genuine businessman. If I stated that, I'd be suggesting that recessions are unavoidable. Wage rigidity therefore contributes to unemployment, at least during recessions, because it signals that wages do not adapt quickly enough to economic shocks....