Can you edit my proposal and 3000-word paper? ill attach the document and the feedback given. my research question is does minimum wage effect unemployment this is the proposal feedback: " You haven’t

Fatim Belem

Senior Seminar

Profs. Khademorezaian

June 14,2025

Literature Review: The Effect of Minimum Wage Increases on Unemployment

1. Introduction

The problem of minimum wage increase represents one of the highly debatable regulation instruments employed by the government to cope with the issue of income inequality and the quality of life of low income earners. With the debate raging on whether the increase in minimum wage contributes to the rise in unkempt, all policymakers and researchers have been called upon to evaluate the overall economic impacts. Although there are indications that increasing minimum wage causes job loss, other research papers show no or rather positive effects on employment. This literature review covers what other scholars have done on the link between raising the minimum wage and unemployment, theoretically and empirically, based on different regions and times. Using a synthesized careful investigation of findings, this review will help to understand the effects of minimum wage rise on unemployment and to take into account other variables that can affect the outcomes.

2. Theoretical Framework

2.1 Classical Economic Theory

According to this theory, which forms the basis of the economists' writings like Adam Smith (1776), appreciating the minimum wage will increase unemployment. This school of thought argues that the workforce industry works on the laws of supply and demand, where employers recruit employees at the salaries they are ready to pay (Yellen, 1995). When the minimum wage exceeds the equilibrium, it will cause the employers to employ less labor because the price of labor is increased. This generates a wage surplus; the amount of employees available to work at the elevated wage exceeds the number of jobs, resulting in rising unemployment, especially among low-skilled and youthful workers (Neumark & Wascher, 2006). The classical theory is full of assumptions on perfect competition in the labor market whereby all firms are price takers with no capacity to affect the wage rates.

The classical position implies that any increase in the minimum wage will distort the labor market, which will increase unemployment, particularly in industries with a large proportion of low-skilled employees (Yellen, 1995). Although this model has continued to shape economic thought, it is not universally held, and other schools of thought have come up to poke holes in its presumptions.

2.2 Monopsony Theory

Another perspective is provided by this theory, which states that in the labor markets where employers exercise strong market power (monopsony), minimum wage hikes might not cause unemployment. Monopoly refers to the situation whereby the employer or fewer employers dominate the labor market and can drive the wages below the competitive equilibrium (Boal et al., 1997). This theory holds that increasing the minimum wage will help rectify this imbalance in the market by increasing the wage rates to more competitive levels, thereby increasing the employment levels of workers and decreasing turnover (Manning, 2003). A monopsonistic labor market means that employers are currently underpaying employees six. Thus, raising the minimum wage may result in greater productivity, less absenteeism, and an all-around more efficient labor market with no adverse effects that the classical theory would have us believe.

Indeed, minimum wage increases in high monopsony power markets can boost employment since a business will more readily take on more workers when the wage is less distant from the competitive equilibrium (Boal et al., 1997). This theory is an alternative to the classical model, and it, applies primarily to sectors in which there are few substantial employers prevail over the labor force, as is the case in some regions and sectors.

2.3 Efficiency Wage Theory

This theory offers another viewpoint, though, in which higher wages can be used to make workers more productive and could compensate for the increased costs employers pay when they offer high wages. In this theory, employers can offer higher wages to induce more laborers to apply, thus preventing turnover and encouraging worker effort. Employers with above-market wage payments may receive higher productivity from their employees, which may lead to reduced hiring and training expenses, reduced errors made, and higher overall productivity (Yellen, 1995). It may be a win-win situation when workers get higher wages and employers enjoy increased productivity and lower turnover.

This theory applies explicitly to the understanding that minimum wage hikes may not lead to job losses because employers can be ready to pass on the increased costs of labor provision as long as they get the dividend of better worker performance (Yellen, 1995). According to the efficiency wage theory, increased wages can ensure that the interests of employees and employers are aligned and that the labor industry becomes productive and efficient.

3. Empirical Studies on the Impact of Minimum Wage Increases on Unemployment

3.1 U.S. Studies on Minimum Wage Increases

A classic study by Card and Krueger (1993), who studied the impact of the 1992 minimum wage increase in New Jersey, concentrated on fast-food restaurants. They discovered that the rise did not cause a decline in employment. The employees working in the fast food sector in New Jersey did not change, which goes against the classical economic theory that indicates that jobs would be lost due to the increase in wages. It was a landmark research work with real-life evidence that differed from the common opinion that increased wages inevitably lead to increased unemployment.

Following up on their previous study, Card and Krueger (2000) compared the impact of the minimum wage increase on employment in New Jersey with that in adjoining Pennsylvania, where there was no such increase in the minimum wage. They discovered that employment rose after the rise in New Jersey compared to Pennsylvania (Card and Krueger, 2000). This result also disputed the classical argument that minimum wage increases inevitably result in job losses, indicating that the local economic factors could be much more critical in defining the effects of the rise in minimum wage.

Neumark and Wascher (2007) extensively reviewed the literature on U.S. experiments. They found that, the increase in the minimum wage result in a rise in unemployment, especially among the youth and laborers with little skill. They claimed that although recent research such as that by Card and Krueger had failed to find a significant impact, the balance of probability was that the long-term effects of minimum wage raises were adverse as companies responded by hiring less, working less, and automating more. Consistent with this position, Sabia, et al., (2012) analyzed the effect of the 2007-2009 federal minimum wage increments. They discovered that the increases resulted in low employment among teenagers and young adults. Although the wage increases may have been friendly to low-income earners, the researchers claimed that there was a loss of jobs because employers cut down on their hiring processes since they had to deal with higher labor costs.

Jardim et al. (2022) analyzed the impacts of a minimum wage raise in Seattle, where the minimum wage increased from 9.47 dollars to 15 dollars an hour in 2016-2018. They discovered that the wage increase reduced employment in low-wage industries, especially among low-skill workers and young employees. The study noted that despite the wage gains by some of the workers, there was a loss of jobs, particularly in industries that rely considerably on low-wage workers (Jardim et al., 2022). The present study was critical because a real-life, large-scale experiment on raising the minimum wage was used.

The findings from the review of the broader economic consequences of the rise in the minimum wage conducted by Meer and West (2016) were as follows: in the short run, the impact on employment was insignificant, whereas in the long run, employment declined by a small margin. The authors proposed that companies would adapt to increased wages by cutting hours, discharging workers, or automating more, resulting in a slight short-run reduction in employment

On the contrary, Schmitt (2013) performed a meta-analysis of over 20 studies on minimum wage and employment in the U.S. Schmitt discovered that most of the research either had neutral or minor adverse impacts on employment. He held that the economic consequences of a minimum wage increase were frequently over-emphasized and that the decrease in income inequality and poverty were substantial advantages.

Lemos (2009) also investigated how the minimum wine increase affected employment between 1990 and 2006. She discovered that the effect on youth employment was adverse but not very large. These impacts were notable, especially in the low-wage, entry-level jobs, as increases in the minimum wage might limit the young worker's chances of joining the labor force.

3.2 International Studies on Minimum Wage and Employment

Although much of the research on the effects of minimum wage has been centered on the U.S., other countries have also conducted several studies that have helped understand how increasing the minimum wage is linked with unemployment. These cross-country studies can be used to expand our knowledge of the effects of minimum wage increases on employment across various economic and institutional settings.

Among the notable studies done internationally is the one by Bhorat et al., (2014), who determined the impact of the minimum wage raises on agricultural employment in South Africa. The situation in South Africa is exciting due to the unusual economic system, featuring a high-income inequality rate and a huge informal labor market. Bhorat et al., (2014) detected that the agricultural sector's minimum wage increase resulted in a substantial employment decline, especially in small-scale farms, which were less likely to offset the added labor payments.

The researcher came up with the conclusion that in an industry with small businesses or few resources, any rise in the minimum wage could lead to adverse employment consequences because employers will be incapable of transferring the extra expenses to the consumers, or they may not be in a position to continue making profits. This gives credence to the classical economic thought that increased wages result in reduced employment in the sectors wherein businesses are already performing with minimal profit margins. The study, however, also indicated that the wage increase mainly affected the smaller, less profitable firms, suggesting that the firm's size is an essential factor in determining the effects of minimum wage policies (Bhorat et al., 2014).

The implications of the study findings apply to other countries whose economies are similar to those of South Africa, especially developing economies where small-scale operations dominate some business sectors. This study suggests that any rise in the minimum wage in these situations must be finely tuned to not have an unbalanced impact on job destruction, especially in fragile sectors like agriculture and hospitality.

Dickens et al., (1999) researched the impacts of implementing the national minimum wage in 1999. The UK study is essential because it is based on a high-income state with a sufficiently flexible labor market. The research authors discovered that the introduction of the minimum wage did not affect the total employment level or, in some cases, had a minor effect. However, there was a substantial difference between various sectors of work and regions. The impact of minimum wage was primarily felt in industries where low-wage employees were highly concentrated, e.g., the retail and hospitality sector, where wages increased significantly (Dickens et al., 1999). The researchers, however, did not detect significant job losses in these industries, implying that the businesses could adapt to the increased labor costs without engaging in massive layoffs.

Among the main lessons of the UK study, the fact that the minimum wage did not cause mass unemployment but was sector-specific is to be mentioned. In other words, wage compression occurs in some low-wage sectors, with the difference between the minimum wage and other wages in the sector narrowing, which could impact the morale and productivity of workers. Nonetheless, the research premise was that there was no significant loss of jobs, especially in the economy at large, when the national minimum wage was introduced (Dickens et al., 1999). The authors pointed to the importance of government interventions and social safety nets in ensuring that low-wage workers would enjoy the policy's benefits but would not be adversely affected in employment.

The experience of the UK indicates that, where there is already a fairly flexible labor market and good social safety nets, the establishment of a national minimum wage may raise wages without causing mass unemployment (Dickens et al., 1999). The study, however, also indicated that the effects of a minimum wage increase could be more felt in some industries and regions where businesses are already faced with high labor costs or low productivity rates.

3.3 Long-Term Studies of Minimum Wage Effects

One of the central topics of the recent literature has been the long-term impact of the minimum wage raise on employment. Schmitt (2013) observed that the immediate negative consequences of employment typically emerge in short-term studies but fade away as time passes. According to a review by Schmitt, the labor market adapts to a rise in minimum wages in the long run, and any losses of jobs observed right after a minimum wage increase are often temporary. The long-term research stresses that the improvement in the economy and the labor market cannot be as dramatic as it was assumed that some industries face the risk of job losses.

By contrast, analyses that look at effects over a longer time horizon tend to reveal a more gradual process of adjustment, in which employers identify methods of absorbing an increase in labor cost in the form of greater efficiency, automation, or shifting the cost to consumers. Therefore, the ultimate impact of raising the minimum wage can be insignificant, especially when the wages are not bumped up too high within a small time frame.

4. Factors Influencing the Effect of Minimum Wage Increases on Unemployment

4.1 Size of the Minimum Wage Increase

The magnitude of the minimum wage raise is the primary factor determining the effect of the minimum wage on unemployment. Greater increases in the minimum wage have a greater likelihood of causing job losses, especially when the increase is far higher than the prevailing minimum wage levels in the region or industry. They also discovered that the higher the increase in the minimum wage, the more likely it is that employment will be adversely affected, particularly in sectors where low-skilled workers are concentrated (Neumark & Wascher, 2007). However, more modest and gradual raises have fewer chances of significantly impacting employment since companies can adapt to increased labor prices without laying off many workers.

4.2 Regional and Sectoral Differences

The minimum wage ensures that the increases affect unemployment differently depending on the region and the industry where they are applied. In areas where unemployment is rampant or the economic status is poor, employment may not be able to cover the increased cost of labor that comes with an increase in the minimum wage; hence, jobs are lost. Conversely, the effects of minimum wage increments on employment will be minimal in areas with better economies and low unemployment rates (Bhorat et al., 2014). On the same note, labor-intensive industries highly dependent on low wages, like retail and hospitality, might suffer greater job losses than industries with a more highly skilled workforce.

4.3 Demographic Group Differences

The increases in wage have a disproportionate impact on some specific demographic groups, such as low-skilled workers, the youth, and minorities. These groups also tend to work in minimum wage-oriented jobs and are thus more susceptible to the loss of employment due to a rise in minimum wage (Katz & Krueger, 1992). Nevertheless, other researchers have indicated that minimum wage hikes can also lessen disparity in income and poverty among these populations since an improvement in wages gives a direct advantage to low-income earners (Gorry, 2013).

5. Long-Term vs. Short-Term Effects

According to the literature, the impact of a minimum wage raise on unemployment is not the same in the long run and the short run. In the short run, businesses might be keen on adapting to the high wages, which will cause a surge in unemployment. However, in the long run, the impacts will likely fade as the labor market corrects. Schmitt (2013) contends that the consequences of raising the minimum wage might include loss of jobs in the short term, but the labor market usually balances itself in the long run.

6. Criticism and Limitations of the Literature

Although the subject has attracted a massive amount of literature, there are numerous criticisms of the existing studies. Most studies have methodological drawbacks, including limited sample size, observation time, and failure to adjust to confounding factors. Moreover, some of the studies use cross-sectional data, and it is not easy to use such data to make causal inferences regarding the connection between the rise of the minimum wage and unemployment (Neumark & Wascher, 2007). Moreover, the discourse on minimum wage impacts tends to be ideologically motivated as the researchers representing both sides of the dispute use various theoretical models and assumptions.

7. Policy Implications and Recommendations

The results of this literature review have significant policy implications for governments contemplating increasing the minimum wage. Policymakers should consider whether the possible improvements in poverty and income inequality are worth raising unemployment among low-skilled workers. According to some researchers, the minimum wage raise should be gradual and regional, giving the business time to adapt to the new labor costs without considerably cutting back on employment (Gorry, 2013). Others promote alternative policies, Job training, and education programs to allow workers to move to higher-paying jobs in response to increases.

8. Data For Hypothesis

8.1. Statistics on Minimum Wage Raises

Data on the history of minimum wage is essential to discover the truth about the effect of the rising minimum wage and unemployment. This will detail when and how much wages will increase in various regions or sectors. By monitoring the surges in the minimum wage over the years, researchers can establish whether employment modifications come along with the rise in the minimum wage (Card & Krueger, 1993). Besides, geographic differences in minimum wage policies matter because when comparing areas with different minimum wage laws, a natural experiment is possible, and it shows whether raising the minimum wage is associated with varied unemployment consequences.

8.2. Unemployment Rates Data

The essence of the testing of this hypothesis is the presence of the data on the unemployment rates, which is supposed to be disaggregated by demographics, including age, level of education, and skill. This assists in establishing whether some groups, like the young or less-educated workers, are affected unfairly by the wage increase (Neumark & Wascher, 2007). Moreover, unemployment data disaggregated by sector would also be informative because industries employing many low-income workers, retail and can respond more to the minimum wage increase and experience more job losses. A comparison between the overall unemployment and the low-wage sector-specific data helps isolate the direct impacts of wage changes.

8.3. Industrial Employment Data

Besides overall unemployment, industry-specific employment levels will be necessary to determine the effects of minimum wage increase on industries that hire many low-income earners. As an illustration, fast food, retail, and hospitality industries have a higher propensity to adjust to minimum wage hikes (Jardim et al., 2022). The hours worked data also proves to be essential because employers can cut workers' hours instead of firing them, which can result in the subsequent reduction of the overall income without a noticeable difference in the number of jobs.

8.4. Company Level Information and Economic Background

There should also be firm-level firm-level data on employment, wage data, and labor cost adjustments. This information will show the business's responsebusiness's response to increased wages, such as slower hiring or more automation (Schmitt, 2013). For example, small firms might be more susceptible to wage increments than large ones. Lastly, knowing the overall macroeconomic environment (e.g., GDP growth and inflation) during wage increments is essential (Bhorat et al., 2014). These economic aspects can determine whether businesses can afford to absorb the increased labor costs and how the economy will adapt to the wage variations.

9. Conclusion

To sum up, the minimal wage raise and its impact on joblessness is a subject on which the literature gives incoherent results, differing in various types of research, areas, and various time frames. The classical economic theory, monopsony theory, and efficiency wage theory are theoretical frameworks that hold different views on the potential effect of wage increases on employment. The real-world experiments in the U.S. and other countries are mixed, with some reporting nearly no impact on employment and others reporting a loss of jobs, particularly among less skilled workers and the younger population groups. The variables needed to test the hypothesis are the historical shift in the wage, the rate of joblessness, sector-based employment level, and macroeconomic indicators.

References

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