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

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gsenviro eNotes educator| Certified Educator

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.

jameadows eNotes educator| Certified Educator

When the minimum wage is increased, traditional economic theory states that it results in structural unemployment, which is the situation that exists when more people are looking for jobs than there are jobs available. The minimum wage is the floor that the government places on wages—the amount below which people are not allowed to work. Raising the minimum wage theoretically results in a surplus of labor, meaning that there are more people who want to work than can find jobs at the wages available. In other words, if the minimum wage is raised too high, it will result in unemployment, because employers will not be able to pay that wage to workers. 

Economists disagree about whether moderate increases in the minimum wage actually result in unemployment in the real world. For example, John Schmitt at the Center for Economic and Policy Research (see the link below) has done research that shows that small increases in the minimum wage do not result in changes in employment.