Candidate Name Jigeesha Banka

Teacher Ms. Duggan

Title of the Article Local lawmakers, business owners

oppose minimum wage

Source of the Article Herald-Standard

Date article was published February 11 2019

Date the commentary was written March 2 2019

Word Count (750 words maximum) 749

​ Section 1: Microeconomics

Section of the syllabus the article relates Section 2: Macroeconomics

to (please mark the one that is most
relevant) Section 3: International Economics

​Section 4: Development Economics

 Minimum wage refers to a minimum price of labour set by governments, in order

to ensure that low-skilled workers can earn an adequate wage which allows them to

access basic goods and services. But some argue, increase in minimum wage may

prove to be “damaging to small businesses” as it raises the cost of production, defined

as the total opportunity costs incurred by firms in order to acquire resources for use in

production. This forces firms to layoff workers and reduce output, since they are not

earning the same amount of profit they did before, and according to the concept of

welfare maximization producers are always seeking to maximise profit. This also

adversely affects the workers as there is now an increase in unemployment. This

concept of increased unemployment is

illustrated in Fig 1, where the initial

minimum wage, Pm1, is fixed at a point

of disequilibrium causing the quantity of

labour supplied, Qs, to be larger than

the quantity of labour demanded, Qd,

which results in unemployment.

Comparatively, the increased minimum

wage, Pm2, results in an even bigger quantity of labour supplied, Qs*, and an even

smaller quantity of labour demanded, Qd*, making the labour surplus even larger,

represented graphically as surplus.* Another concern small-businesses share is that the

increased minimum wage puts them “above neighbouring states, making it harder to

compete,” causing businesses to leave the market due to their inability to compete with
producers who have lower prices for their goods because they don’t have an increased

cost of production. This means, for suppliers in Pennsylvania the supply curve shifts to

the left which causes their market price to be higher than their neighbouring states as

the neighbouring states supply did not decrease. The equilibrium price is higher in

Pennsylvania because with the decreased supply, at the initial price there has been a

move from equilibrium to disequilibrium, where there is now excess demand. This

causes price to increase until it reaches a point where the shortage has been

eliminated, and there is a higher equilibrium price and lower quantity supplied.

A rise in minimum wage harms producer and consumers and has a mixed effect

on society as a whole and workers. Firms now face a higher cost of production due to

higher labour costs, causing them to raise the price of their products which incentivizes

consumers to buy less of the product, as they now have less utility due to the increased

price, causing the producers to suffer loss as the amount of money they are spending

for production is greater than their

revenue. This is reflected in Fig 2, by the

leftward shift of the supply curve from S1

to S2. On the initial equilibrium point, e1,

the price was lower $7.99, and the initial

equilibrium quantity was higher. But after

the shift, the market disequilibrated at the

initial price of $7.99, represented by point

a, causing a shortage. This increased the price to $15.99 where the shortage had been
eliminated. The new equilibrium point,e2, had a higher equilibrium price and a lower

equilibrium quantity, which shows that as the price rose consumer desire for the product

fell, thus incentivizing firms to reduce output. The reduced amount of output also

indicates that producers will be firing more workers as the firm's quantity of production

has decreased, and the increase in labour wage is not very profitable for firms, thus

workers are also worse off. However, there is also a group of workers who will benefit,

as some workers will be able to keep their jobs and enjoy a higher income than before.

These workers will now have a better standard of living and be able to afford goods and

services they could not before.

Consumers are at a disadvantage because “the increase would be a cost burden

shouldered by the consumers through higher prices for goods and services.” Shown in

Fig 2 where the increased production costs leads to a decrease in supply which leads to

higher prices and lower quantities of the good. However, the increased minimum wage

allows “tens of thousands of people to work their way off of public assistance.” As a

result of this, these workers are no longer entitled to government aid as they are now

above the poverty line, allowing government

exchequer to be spent on other important society

requirements; which benefits society. However,

the society also gains some disadvantage

because the increase in minimum wage causes

the negative welfare impacts to increase, since

there is an underallocation of labour resources

relative to the social optimum as shown in Fig 3, where Qd* is less than Qe.

Additionally, the increase in deadweight loss is illustrated by the blue shaded region at

Pm1, initial minimum wage, and the blue plus red shaded region as the price floor

increases to Pm2. Lastly, increase in minimum wage harms producers through loss of

profit, consumers through loss of utility, workers through increased unemployment and

society through increased welfare loss; this shows that almost every stakeholder is

worse off because of the increase in labour wage.