What would be the impact of raising the federal minimum wage on a firm?

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justaguide | College Teacher | (Level 2) Distinguished Educator

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An increase in the federal minimum wage would increase the cost of labor for a firm.

To maintain its profits, the firm could pass on the increase in the cost of labor to its customers by increasing the price of its products. But if the price elasticity of demand of the products it sells is high, a small increase in price will lead to a large decrease in demand and reduce the sales revenue. This may force the firm to absorb some of the higher labor costs which will reduce its profits.

In response to an increase in the federal minimum wage, a firm would have to look at the role played by each of its employees and determine if it is possible to increase the responsibility of those that are more skillful and efficient and lay off those that are not. The firm would also have to consider automating some of the processes that are presently being done by humans so that it can save on the labor costs.

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