Unemployment as Direct Consequence of an Increase in Price Floors

Economy and its impact on society has always been a theme of study through humanity’s development. Due to broad technological, intellectual, and political advances, and also due natural resources’ exploitation, especially in the last three centuries, some regulatory measurements have been established in order to keep equilibrium between economy and social changes. The bound between economics and society is so responsive to changes that every action in any of both will have an implication in the other. As an example of the regulatory policies previously mentioned and its consequences on population, price floors such as a minimum wage work as determinants in labor activities and corporate planning. Even though minimum wage laws are theoretically seeking “a level of economic equality, rather than have copious amounts of underpaid or poor citizens” (Vitez), the basic salary results in a surplus of labor and hence unemployment.

When an increase in price floors occur, say minimum wage increase, unemployed population tends to start applying for job opportunities, and employed population is prone to look for a salary increase or a better paid occupation. These in response to the distortion of labor market caused by the displacement of its equilibrium, which implies a possible increase in people’s willingness to work; consequently, a surplus of labor will come into view. Given an increase in minimum wage, employers of small businesses “must hire fewer employees or downsize to comply with the minimum wage law, which has a direct impact on unemployment rates” (Owen). In theory, if there is an enlargement of workforce, then businesses must have more choices to employ from the labor market, which supposes an opportunity to contract more experienced personnel. On the other hand, as E. Owen affirms, job opportunities will decline in order to counteract and balance businesses’ marginal cost that an increase in wages implies, which leads to unemployment increment.

“Employers prefer to hire talented young people over less-skilled adults” (Garthwaite). Under these circumstances, not only less people is contracted, but also current employers of a business may be dismissed if they do not meet skill requirements. The labor market opens a replace space where non-skilled or less-skilled workers are displaced by high-skilled people in view of industries’ needing to optimize their workforce’s predetermined budget. Additionally, some workers pursuing a higher wage may end up quitting their jobs, but remaining out of work due to the low employee demand. At the time demand for workforce contracts and surplus of labor occur, the difference between the demanded employers before the wage increase, and the current employers after the increase, results in the total of new “unemployed” categorized people.

Some may argue, as Aaron Pacitti, Associate professor of economics at Siena College, that “firms can compensate for the higher labor costs by raising prices.” This solution seems reasonable, and maybe it could be a possible solution for specific market cases. Nevertheless, generally speaking, an increase in product prices will result in a decline in quantity demanded. As a product price rises, consumers may be more likely to buy a lower price substitute or abstain from buying the product.

To summarize, price floors such as a minimum wage definitely will result in a surplus of labor because of the high increase of personnel willing to get a job opportunity that offers an increased wage. Additionally, businesses seek to maintain their respective profit and predetermined budget for workforce, which leads on low employing demand and higher dismissing chances in order to keep industry’s equilibrium. To compensate these losses, some economists suggest price increases, but consumers’ responses may vary and market behavior should be respectively studied before the implementation of this measure. Even though economy laws theoretically work well, its viability is uncertain until they are applied in the real field of study.