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Economics of Minimum Wage A Policy Analysis

# Minimum Wage—Policy Analysis 

The following is an excerpt from the upcoming publication under Macroeconomics. The research focussed report written with a storyline discusses the intersection of policies, economics, finance, science, technology, art & culture. This is a signature presentation from The middle Road.

The recent policy to increase the minimum wage to $15 per hour is well thought of policy by the Biden administration. Minimum wage enables social change and impact through empowering especially the marginalized and underserved communities globally. Further many students in the US work part-time to fund their education and serves as an important source of meeting operational expenses. As tuition fees have increased steadily over the years in the US, wages especially minimum wages have not kept in step creating a widening gap between the two. The productivity of employees has gone up and so should minimum wage. 

Let’s take a look at both the demand and supply side of this policy.

Demand Side Economics: An increase in the minimum wage would increase the disposable income adjusted for propensity to consume. Example hours per week in a month translates into $2400 per month. If the marginal propensity to consume is 70% i.e. you will spend 70% of your earnings on goods and services is $1680. If the minimum wage is $11, the increase in consumption is (15-11)*40*4 per month=$640 per month.

Y is the output or income of all households. The income is divided between savings and  consumption. T is summation of all taxes i.e. corporate and sales tax.

The disposable income is Y-T; Left Y = Output, T: Taxes

Supply-Side Economics: Supply focussed economists will say that an increase in the minimum wage would motivate people to work harder, increase working hours to more than 40 hours per week as they now get to earn more wages for their output. They might be more diligent and productive, and also have an incentive to work long hours and therefore be productive. Ignore taxes and keep other factors constant.

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