Minimum Wage (Chain of Analysis)
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Last updated 12 Jan 2019
This short revision video provides an example of how to build a clear chain of analytical reasoning on the issue of how business profits might be affected by an increase in the minimum wage.
A minimum wage is a legally protected pay floor in the labour market. An employer cannot pay below it.
One possible effect of a higher minimum wage is that a business such as a fast-food provider will experience a rise in their variable costs.
This is because hourly wage costs will increase leading to a rise in total variable costs.
Assuming that labour productivity remains constant, then average variable cost will rise and so too will marginal and average total cost.
As a result of an upward shift in costs, the profit margin that firms make will fall. This is shown in my analysis diagram.
The effect on profit then depends on whether a firm passes on higher costs to consumers which in turn depends on price elasticity of demand