Neumark Case Solution
Minimum Wage is a Subsidy on Unskilled Labor and a Good Policy to Reduce Income Inequality
In order to critically examine the relationship between minimum wage increase, income inequality and subsidy on unskilled labor, the redistribution theory would be discussed where the wages are taken from various parts of country’s economy and transfer it to the low-income labors, also the marginal productivity theory signifies that the wages of low-skilled labor would be increased by minimum wage, thereby altering the labor market for lowest skilled and low skilled workers.
The relationship between income inequality and minimum wage is negative, also the minimum wage real value can lower the income inequality. Most significantly, it should be notified that the real value of the minimum wage most probably impact on the income inequality trough redistributing wealth, from the people buying goods which have been made by the minimum wage labors and the company’s stakeholders who are high minimum wage workers. The effect of minimum wage on income inequality is inevitable and depends on certain factors, including minimum wage coverage rate, as the OECD countries have minimum wages, the increase in the minimum wage must not cause changes in the wages for the uncovered labor at a sufficient level affecting income inequality. This in turn would lead to the redistribution theory.
As such, the decreasing profits and salaries of the executives and high level employees is the simplest way to increase to the minimum wages. Most importantly, the employees’ salaries would not decrease, but they would rather grow when the minimum wage tends to increase. By this mechanism, the second step of the redistribution theory would be to raise the prices for the purpose of paying for the minimum wage, thereby affecting purchasing power of customers. If the income of the low wage workers is increased, one can expect decrease in income inequality (Litwin, 2015).
On the other hand, if the government desperately wants to assist the unskilled and poor workers, it can opt for the wage subsidy, this would most likely allow people being employed with the smaller cost burden on the employers of the company, it can also be used to encourage employees (Fox, 2013)...........
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