President Barack Obamas quest to raise the federal minumum w

President Barack Obama\'s quest to raise the federal minumum wage to $10.10 an hour would eliminate about 500,000 jobs by 2016 but increase pay for millions of American\'s and lift nearly a million out of poverty, a Congressional Budget Office report found. Analyze the labor market with a minimum wage of $10.10 per hour. Show the shift of supply and/or demand curves and explain why the curve(s) shifted.

Solution

Wages is the price paid by business sector for using labor service. Laborers are supplying labor and producers are creating demand. Supply of labor is directly related with it price. If wages is rising, then income of the people will rise. Here wage rise by $10.10 is raising the income of the people. As a result about million of people is moving above the poverty line. This increase in income will increase consumption demand. They will now spend a portion of their extra income for additional consumption. So demand of commodities will rise. Thus demand of commodity in the commodity market will rise. In factors market, due to higher wages more laborers are now ready to do the job. So supply of labor will rise. It will shift supply curve of labor to the right.

Now consider demand created by manufacturer. Due to rise in wage rate, cost of production is going up. So profit will decrease. It will reduce the demand for labor. In the problem it has been mentioned that 500,000 jobs will be eliminated. So the demand curve of labor will shift to the left. In commodity market, due to loss of jobs by 5 lakh laborers, demand of commodities will drop.

Now consider the combined effect. Here 5 lakh jobs are lost but one million people are moving out of poverty. Although more workers are available for the job, the emplyment will fall due to decrease in demand. It is short run effect. In long run average wages will decrease although minimum wage is maintained as perdecision of federal. Also due to increase in commodity demand manufacturer will increase the production. So demand of laborers in the long run will rise by lowering average wage rate. Ultimately employment will rise from L1 to L2 as shown below with lowr average wage rate.

In commodity market, increase in demand due to rise in minimum wage rate will be more than decrease in commodity demand due to loss of employment. Net effect will be a rise in price of commodity. It will induce producers to produce more in the long run to satisfy increased demand.

Conclusion: In labor market, supply of labor will rise and demand of labor will fall. So demand curve will shift to the left and supply curve to the right.

In commodity market demand of commodity will rise in short run. Supply of commodity will drop due to elimination of 5 lakh jobs. So price of commodity will move up.