Discuss what elasticity conditions (labor demand/supply, perfectly elastic, elastic, unitary elastic, inelastic, or perfectly inelastic) would be needed for the minimum wage to benefit low-income workers.

Quick answer:

Each elasticity condition comes with its own positives and negatives for low income workers. However, reality has shown that problems with low wages have less to do with elasticity and more to do with corporations having the power to pay workers as little as possible regardless of market conditions.

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Each of the elasticity conditions comes with its own drawbacks. As another Educator has detailed, under most elastic conditions, increasing an employer’s salary tends to lead to a reduction of the workforce. While some workers benefit from the increase, others do not. Now, the fired workers receive no wages and must depend on whatever benefits they can acquire from the government.

An elastic environment might help low income workers because it gives them the hope that the prices will change and thus their wages will increase.

Inelastic conditions, too, could benefit low income workers if the stable prices and wages are already benefiting them.

A perfectly competitive market might be, as the name suggests, the perfect choice. Although, if employers end up taking prices that aren’t so high, then the workers are out luck.

In reality, the problem with minimum wage has less to do with elasticity and more to do with international trade deals, globalization, and the trend of big corporations paying their employees as little as possible regardless of elasticity or supply and demand.

For example, Amazon and Walmart have made billions of dollars in profit because of COVID-19. The demand for what they can supply is high, yet the wages for their workers remain low.

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Although it might seem obvious that low-income workers would desire and would benefit most from an increase in minimum wage, that is not necessarily the case. Two conditions are most likely to benefit low-income worker. The first pertains to the minimum wage level, and the other concerns increases in the minimum wage rate. Therefore, one can observe the connection between the inelasticity of demand for low-wage labor and increases in minimum wage. This is the correlation identified by Leif Danziger in “The Elasticity of Labor Demand and the Minimum Wage.”

Minimum wage level corresponding to unitary elastic aggregate demand will generally most benefit low-wage workers. However, the same is not true for wage rate increases, as the best situation is associated with inelastic aggregate demand for labor. One main reason for this differential correlation is that raising workers’ wages tends to reduce the number of jobs because of lay-offs, so that the lower-paid workers end up with no employment and thus no wages. Instead, they will have a “reservation wage rate,” which primarily consists of account for benefits such as unemployment insurance. Workers may also benefit in non-financial ways from increased time available for other pursuits, including seeking employment.

Given the importance of reservation wage rates, analysis must account for the critical value of the elasticity of labor demand. This means in part that a higher minimum wage rate improves the low-wage workers’ situation when labor demand is less elastic than the critical value; in contrast, when labor demand is more elastic than the critical value, such workers will be worse off . Unemployment benefits are an important factor corresponding to decreasing elasticity of labor demand.

Danziger, L. J Popul Econ (2009) 22: 757. https://doi.org/10.1007/s00148-007-0179-y

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