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Explanation of Minimum Wage according to Economic Theory The structure can be well represented monopolistic and competitive model that are found on the current labor market. The model gives a negative prediction in relation to employment effects. The competitive model states that, if minimum wage has been set higher than the standard clearing level, the level of employment will reduce and unemployment will be affected immediately. In the other hand, monopoly model explains that employment will increase when the minimum wage is decided within a specific range that is above the monopoly wage. Therefore, the minimum wage must be set lower than the marginal revenue. Competitive model in the labor market According to the model, it is assumed that the firms are free to hire more workers without raising wages. Under this model, the increment in minimum wage is normally meant to decline the level of employment. Therefore, the decrease of jobs will be noted if the rate of wages is increased above the level of equilibrium. It is normally meant to restore the standards that are achieved from the marginal revenue and the rate of wages in the labor market. There are some employees whose productivity is set under the minimum wage and there work is normally priced out of the market. Therefore, the minimum wage that is higher than the equilibrium level will increase the level of unemployment of the workers that are involved. Monopsony model The main assumption in this model is that companies need to raise wages for them to be able to hire more workers in the sector. It is evident that more workers in the model will increase the cost of the monopolist and the cost will be higher than the employee’s wage. The wage is higher than the wage that has already been paid by the employees. In addition, the wage increase of the workers will be directly proportional to that of the firm. The profit making monopsonist will tend to hire and employ fewer workers in the firm at a very low wage range than the other competing firm. The monopsonist will be willing to employ more workers in the firm with increase of the wage rates. The main reason for raising
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  • Winter '19
  • ISAAK
  • Explanation of Minimum Wage

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