The labor market formation has opened new opportunities for the self-fulfillment of people, but simultaneously it has led to the appearance of new problems, primarily related to the sharp decline in demand for labor, the emergence of unemployment, and poverty. In our days, as a result of a systemic financial crisis, the problem of unemployment and poverty is an integral part of market reforms. While being very topical, this problem is still poorly understood. The structure of real labor markets is very different and complex. In order to understand it, it is necessary to address the relevant economic theories and models. Thus, the paper analyzes the article about the current significant issue of the wage rate and the poverty level by using the neoclassical economic theory, as well as the underlying theoretical models in order to better understand today’s labor market and learn to solve current labor market problems.
The article called A Reckless Wager published in The Economist claims that there is a global shift toward higher minimum wages (A Reckless Wager). Both in America and Europe, the policymakers are raising minimum wages. Thus, in America, the campaigners wish the minimum wage to be two times higher and reach seventy-seven percent of median hourly income, and they have already managed to reach success in several big cities. The idea is also supported by the democrats led by Hillary Clinton (A Reckless Wager). is the same situation happens in Britain and Germany? The policymakers are encouraged by the fact that when the prices rise, the quantity demanded decreases, and the modest minimum wages do not lower the demand for labor. This is supported by the numerous worldwide studies. Besides, the minimum wages prevent employees from moving elsewhere due to the perceived risk. Furthermore, they may even increase employees productivity as they will value their jobs more (A Reckless Wager). However, it does not mean that the higher minimum wages will be harmless similarly to the lower ones it would be wrong to assume so. Besides, very little is known about the long term influence of the modest minimum wages; moreover, even less is known about the effects of the continuous application of higher minimum wages. So, according to the article, the shift toward higher minimum wages is quite dangerous, in particular for poor people who it is directed to help (A Reckless Wager).
First of all, the sharply heightened minimum wages will force some workers to leave the labor force. This is especially true with the low skilled workers. Thus, with the higher wage a cashier with few skills becomes more expensive than an automotive checkout machine that will substitute the few skills of the cashier and even add more (A Reckless Wager). At the same time, a building worker with more skills can not be so easily substituted. Even the improvement in economic conditions that could happen soon would not be able to generate enough jobs to replace those that were lost. Thus, the article claims that the higher minimum wages will aggravate the discrimination against the low skilled workers (A Reckless Wager). According to it, due to the technological development, now is the best time to increase minimum wages (A Reckless Wager). Increasingly more employers replace their workers with technology, and such rise will encourage them to invest in it even more. Besides, not only cahiers, receptionists, workers at warehouses, or drivers of lorries could lose their jobs, but also the workers in tourism and manufacturing, due to increased foreign competition (A Reckless Wager).
Secondly, only one fifth of the income benefits goes to the poor. Thus, according to the article, the richest ten percent will benefit more than the poorest ten (A Reckless Wager). Besides, someone will always have to pay for such increase. Ultimately, the cost will be passed on to consumers, and the minimum wage will turn into a subsidy funded by a sales tax, so the repercussions of such alignment of the revenue will fall on the shoulders of the poor (A Reckless Wager).
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Finally, the article suggests using tax credits that are significantly more efficient in helping the poor, so the three quarters of the income benefits would go to the employees (A Reckless Wager). The employers would be encouraged to hire low-skilled workers instead of launching new technologies. It concludes with the claim that governments should rely on evidence, not emotions, and that the minimum wages can work only if they are modest (A Reckless Wager).
Labor economics strives to understand the dynamics of labor markets and the way they function. Such markets function on the basis of the interaction between the employees and employers. Labor economics considers the suppliers of labor in comparison with employees, the demands of labor in comparison with employers, and tries to understand the resulting structure of wages, employment, and income (Cahuc et al.). In general, it deals with the analysis of the labor market, labor force, and employment. Also it investigates labor relations, examines the income of workers and labor costs, and studies the problems of productivity and efficiency of labor. It is what A Reckless Wager is talking about. The article discusses the labor economics by studying the interaction between the workers and employers and the way it is influenced by the minimum wage rate (A Reckless Wager).
The article explicitly refers to how the minimum wage will affect each firm by using the labor demand model. It also regards the decision of the workers to participate in the market by using the labor-leisure model, and its overall effect on the welfare of the economy by using the welfare and labor demand-labor supply model.
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First of all, according to the article, if the minimum wage rate is increased, then the labor demand will decline, especially among the unskilled or low-skilled workers (A Reckless Wager). The reason for it is that the more the employer has to pay for a worker, the fewer number of workers he can afford, and thus hire. The labor demand model studies the consistency and the interrelation between those two indicators, and defines the behavior of the demand (Cahuc et al.).
Secondly, according to the article, the poor receive only the smallest part of the income benefits (A Reckless Wager). It means that the labor is not the significant source of income for them, so it does not contribute to the appropriate level of utility. Thus, the poorer people and the low-skilled workers may choose to devote more time to leisure. The labor-leisure model studies such consistency. It examines how individuals may distribute their own time taking into account various indicators, including the wage rate (Cahuc et al.). With regard to the decisions made according to the labor-leisure model, the indifference curve shows the various combinations of dependency between the daily income and leisure time that can ensure some certain level of utility.
Finally, according to the article, the new policy of increased minimum wages entails the stronger economy, thus increasing welfare and generating additional jobs that will replace the lost ones (A Reckless Wager). Besides, the article recommends using such tools or welfare programs as tax credits that would help the poor more efficiently. The article relates to the welfare and labor demand-labor supply model as it analyzes the interrelations between the welfare programs and their influence on supply and demand (Cahuc et al.).
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By studying the resources and conducting an analysis, it can be stated that majority of the articles claims are supported by the neoclassical theory and the underlying economic models.
Thus, the labor demand model supports the claim of the article that the increased minimum wage rate will lower the labor demand. So, in the basic model of labor market, the labor demand dependency on the price of labor is determined by the influence of economies of scale and the effect of substitution (Cahuc et al.). According to the first determinant, if the wage rates increase for some reasons, it will lead to the increased production costs and therefore, to the increase of the price of products. Consequently, it leads to the reduction of production scales and, as a result, to the reduction of labor demand (Cahuc et al.). Conversely, when wages are decreasing, economies of scale cause the increase in the labor demand. The substitution effect reflects lower labor demand in the case of increased production costs by replacing more expensive factor of production (labor) with the relatively cheaper factor (capital) (Cahuc et al.). Conversely, the reduction of the cost of labor leads to the replacement of the relatively more expensive factor (capital) with the relatively cheaper one (labor), causing increased labor demand. Thus, the article shows how the employers substitute the more expensive low-skilled labor with the cheaper capital in the form of automotive machines. Besides, according to Parker, with the higher minimum wage rates the labor demand specifically for unskilled labor will reduce, while the labor supply will increase (Parker). It is also hard to reach the equality between the demand and supply, as it is indirectly revealed in the article.
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Additionally, the article states that the labor is not the significant source of income for poor people, so it does not contribute to their appropriate level of utility. It is supported by the labor-leisure model, where the fact of dependency of labor supply on the wage rate appears to be contradictory (Cahuc et al.). First, wage largely determines people’s decisions to participate in wage labor. Ceteris paribus, more people want to receive a higher rate for working instead of a lower rate. This trend is due to the effect of replacement (Cahuc et al.). That is, if the money (e.g. goods and services that can be bought with this money) earned by an extra hour of work is more useful for a person than an hour of free time, they will prefer labor to leisure, replacing spare time with paid work and thus increasing the labor supply (Cahuc et al.). Clearly, the higher the salary is, the higher the supply gets. However, as the poor are significantly underpaid, they do not reach the required level of utility. So, they may decide that free time is more valuable to them. The article claims that the increased minimum wage is the bad way to eradicate poverty because it will either force people to work more, thus further increasing the difference between the correlation of time spent working to time spent resting for rich and poor, or make the poor decidedly value their spare time more, and thus earning even less.
However, according to the ASPE, the articles refusal to support the British governments claim that the future stronger economy will generate enough jobs to replace the lost ones is not warranted (How Well). This is because the welfare and labor demand-labor supply model shows that the welfare reforms, such as increased minimum wage, will also increase the labor demand, although slightly (How Well). Besides, the articles recommendations that the tax rate is a more efficient way to fight poverty also could not be supported by the neoclassical welfare and labor demand and supply model. The reason for this lies in the fact that an individual who in the absence of a welfare system has a level of income below the target level of income, will always prefer to leave the labor force once such a welfare system becomes available, since the level of income and leisure both increase in this case (How Well).
A Reckless Wager correctly claims that the increased minimum wage will increase the poverty level, and correctly suggests using a different method in order to help the poor. However, in order to adjust its recommendation in accordance with the economic theory, it is better to use the earned income tax credit (EITC) instead of a simple tax credit.
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First of all, the EITC helps to increase the incomes of low-income families instead of single individuals, who suffer from the poverty and inequality much more (Neumark). Also, the EITC motivates the most significantly affected people, in particular single mothers, to search for the job and enter the labor market, thus increasing employment and labor demand (Neumark). So, the system could be adjusted to the neoclassical economic theory by increasing the welfare and demand. Besides, there is also a fact of dependency of the labor demand-labor supply model on the price of labor.
Additionally, this tax credit reduces poverty not only by providing additional income, but also by creating incentives, so the families could earn their way out of poverty faster (Neumark). Here the adjustment to the labor-leisure theoretical model can be demonstrated, because the families value the work more than the leisure.
Moreover, the EITC could be financed by people or organizations with highest incomes, and not by those who employ minimum wage workers, who do not necessarily earn high incomes (Neumark). Besides, the EITC reduces the costs of labor for employers, so the entitled ultimately earn more per hour once the credit is adjusted, thus increasing the labor supply (Neumark). This way the system functions in accordance with the welfare and labor demand-labor supply model because the demand for leisure does not increase.
Furthermore, EITC creates lower wages for some ineligible workers. Thus, the employers do not have to fire the low-skilled labor due to the increased wages (Neumark). So, the wage is not growing, and the demand is not reducing.
Finally, it is better to use both policies of minimum wage and the EITC in combination. The value that both policies could provide together exceeds the value they can provide separately. Thus, the minimum wage could complement the earned income tax credit by increasing the work incentives for single mothers with children who face high work-related expenses for child care, thus increasing the poverty reduction for this segment of the population (Neumark). Thus, such adjusted recommendation will solve the existing problem with the increase of the minimum wage, and at the same time, it will correspond to the relevant neoclassical economic theory, as well as to the underlying models.
The article called A Reckless Wager is about the current economic problems, such as the increase of the minimum wage. According to the article, the higher minimum wage rate would negatively influence the poorest part of people, those who it is aimed to help. The article significantly relates to the labor economics that studies the wage labor market and relations between the wage, employment, and similar indicators. Within the labor economics, the article relates to how the minimum wage could affect each firm by using the labor demand model, as well as addressing the decision of the workers to participate in the market by using the labor-leisure model, and the overall effect on the welfare of the economy by using the welfare and labor demand-labor supply model. The article’s predictions that the increased minimum wage rate will lower the labor demand and that it is a bad way to eradicate poverty are supported by the neoclassical economic theory. However, the recommendation to use the tax rate that is a more efficient way to fight poverty can not be supported by the theory. Thus, in order to adjust this recommendation to the theory, it is better to use the earned income tax credit.