The Concept of the Minimum Wage

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Kosters (1996) states, that the increase in the minimum wages has varied implications on the firms and on the employment of the workers, especially the unskilled and the teen workers. The reason for this is explained by economic theory. Economic theory argues that as the minimum wage increases. the least wage that is paid by the firm to the worker is increased. As a consequence, the cost of the production of the firm increases and, as Kosters (1996) points out (see chart 1 and Chart 2 in Appendix). Since profit maximization and cost minimization are two objectives that the firms want to achieve, the firms concentrate on reducing their costs because of the increase in the minimum wages. The easiest way of the firms in such a case is to fire some of its workers and, as a result, the employment falls. The firms may also not be keen to hire more workers because of the cost constraints they face. The theory about the increases in the minimum wage and the adverse effects on the labor markets has been substantiated by the evidence from many nations. Usually, it is observed that the countries with the highest minimum wages have the highest unemployment rates. According to Chapman (2004), the three states in the US namely Washington, Alaska and Oregon have the highest implemented minimum wages and so the highest unemployment rates. The research director of the employment policies, Craig Garthwaite, has been noted as saying the following. ‘It is perhaps no coincidence that the three states with the highest minimum wages in the nation—Oregon, Washington, and Alaska—are among the five states with the highest unemployment rates in the nation’ The relation of employment and minimum wages may be true to some extent. However, economists now argue that the theory is based on oversimplifications and that the increases in the minimum wages.