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Raising the minimum wage has and will always be contentious. Detractors will cite highly-successful economies without a minimum wage, like Hong Kong (minimum wage only implemented in 2010). Supporters will cite how the equilibrium wage is likely to not provide a “living wage.”
A minimum wage will only reduce unemployment if it is effective. If the minimum wage is above the equilibrium, then there will not only be frictional unemployment, but also high wait unemployment because the demand for labor will be lower than the supply of labor. Unions have the same effect if they push up wages to above the equilibrium.
Raising the minimum wage can also decrease output and growth, because as unemployment goes up, the economy is utilizing less and less resources to produce output. With lower output, savings decrease, decreasing investment—a crucial element of growth.
Under the neoclassical model, with higher minimum wage, people not in the labor force have a higher opportunity cost of not working, and would be incentivized to work. More workers will join the labor force from the general population because wages are higher. With an increased labor force, capital per labor would decrease, decreasing output per capita.
If labor gets more expensive, however, firms may be more inclined to invest in capital. If the United States raises real minimum wage at all, it should raise it so companies will invest in more capital until capital stock reaches the Golden Rule capital stock, creating optimal growth.
Although the models show that raising the minimum wage may increase growth if capital is below the Golden Rule capital stock, chances are that the unemployment caused by raising the minimum wage in competitive labor markets—ignoring monopsony in the labor market—will create more costs, as it directly lowers output and savings, and therefore investment and growth.
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