What type of unemployment is it when the minimum wage increases? Is it structural, frictional, cyclical or voluntary unemployment and why?

1 Answer | Add Yours

gsenviro's profile pic

gsenviro | College Teacher | (Level 1) Educator Emeritus

Posted on

An increase in minimum wage will lead to Structural Unemployment.  

Structural unemployment is caused by a difference between the number of jobs available and the "trained" potential workers. This mismatch could be due to a potential worker's actual worth being less than the prevailing minimum wages. What a person can contribute to any job (also termed as marginal revenue product) may be less than the minimum wage set by the government or trade union. This could be due to lower skill level or other aspects (such as lower intelligence, etc.). Consider what happens when the manufacturing process is automated. In such a scenario, a large number of workers trained in manual work will be fired and only the ones who can work with automated systems or automation will be employed. These new workers will have a better skill set and thus will command higher pay. A similar event happened when the dot-com bubble burst in the early 2000s and people were fired. Many of them acquired training and were hired in the booming construction industry. 

A hike in minimum wages generally makes employers more selective in hiring employees. It also leads to illegal hiring of many workers at lower than prevailing wages; these are the workers who are not "trained" enough for the new minimum wages, or in more technical terms, their marginal revenue product is less than the hiked minimum wage.


We’ve answered 319,639 questions. We can answer yours, too.

Ask a question