Impact of Price Floor to Unemployment Essay

Introduction

In any free market, the salaries paid help in balancing the market equilibrium to ensure that the quantity supplied to the market for customers equals the quantity demanded. In case the federal government intercedes with laws and other policies such as tax, subsidies, ceiling of price floor, and the market stability will automatically be distorted (Meer & West, 2016). The charged floor is the minimum authorized expense that the government sets for its institutions to pay the lowest earning employee. If a price floor is set, it increases the parent of unskilled workers within an economy. The floor price increases the supply of the unskilled labor which leads to unemployment as firms are unable to accommodate all the available labor at the wages which the government has directed them to pay. A market that has inelastic demand for labor and is price insensitive to a more considerable extent, then only a few will be laid off but if the market has elastic labor demand and is price sensitive, then the majority of the labor will be sent home from their regular jobs due to the minimum pay rule (Meer & West, 2016).

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The Large Unskilled Population Is Rendered Jobless

The primary reason as to why the setting of minimum wage price will lead to unemployment is that majority of the countries are undeveloped (mainly African countries), or they are still third world country such as Brazil. These are countries with the highest level of the unskilled labor force. In case a price floor is set, and a majority of the firms which hire these labor on contractual basis fail to meet the price floor, most of them will be left unemployed (Meer & West, 2016). The unemployment rate in these type of countries will be high as the majority of their population consists of low earning employees. The developed countries which have a majority of their labor earning above the minimum wages are less likely to be affected as the minimum wages rule does not imply to them.

Worse Working Environment

Raising the wages of the employees with jobs at the current market will not only facilitate a high rate of unemployment but will also worsen the working situation within different organizations (Meer & West, 2016). The unskilled and mid-skilled computer illiterate employees suffer a significant cost due to minimum wage as the firms will have to replace them by searching for new skilled employees who can accept the slightly above the price floor wages. The scouted employees are computer literate hence enable to use of computers in production. The use of computers will further displace unskilled labor as the machines perform their routine work when executed by the new hired skilled labor. The stipulated remuneration rule is also likely to change depending on the entire number of hours worked by employees (Meer & West, 2016). The reduction in the number of hours worked by the labor force slows down the production rate. The decrease in the number of hours worked by the lucky few who will be hired at the floor price means that they will still be left idle most of the day as firms do not want to overspend on them when working full time.

Closure of Small Businesses Leading to Unemployment

The setting of minimum pay is also likely to cause unemployment due to closure is middle and small scale business who may find it hard to carry on with the set minimum wage pay. It is difficult for small businesses to pay lucrative salaries for the increased labor force as the majority of them operate on limited payroll budget hence setting the minimum price (Meer & West, 2016).

Reference

Meer, J., & West, J. (2016). Effects of the minimum wage on employment dynamics. Journal of Human Resources, 51(2), 500-522. Retrieved from https://www.google.com/url?sa=t&source=web&rct=j&url=https://research.upjohn.org/cgi/viewcontent.cgi%3Farticle%3D1250%26context%3Dup_workingpapers&ved=2ahUKEwiNqcz-pfXhAhXRxIUKHer0B3kQFjABegQIBhAB&usg=AOvVaw2rg6a3d8WxiGmPmjpiwwLS