Free Essay On Microeconomics

Minimum Wage

The minimum wage is the lowest wage that should be paid as passed by the government or as a result of an agreement with a labor union. The minimum wage debate gives rise to a wide field of interest that include: wages, employment, income, income trajectories of low-skilled workers , effects on the firms such as working conditions and utilization of inputs with which low-skilled labor which is complementary (Jeffrey and Michael, p6).
Utilization or enforcement of minimum wage has a myriad of effects though there is always an ongoing debate about its actual effects. As put forth by Jeffrey and Michael p36, the wage distribution of low-skilled workers shifts as intended due to minimum wage, its consequence on income, employment, and income growth are negative. According to statistics, minimum wage increases in the US reduced the national employment to population ratio by 0.7% between the period of December 2006 and December 2012 (Jeffrey and Michael p6). This means that, minimum wage increases effects accounted for 14% of the national decline in employment to population ratio in the stated period.
Moreover, minimum wage increases significantly led to a reduced likelihood that the low skilled worker raised to middle-class earnings. On this basis, the argument that high wages would assist the low-income earners as per the speech is true. This is because the proposal call upon the congress to draft and pass a law that allows for a wage increment to the low income earners. This would help the low wage workers live a descent life and makes end meet. As such, the congress should consider the wages rise. (www.whitehouse.gov).
The reduced likelihood started to emerge one year after the declines in low-wage employment. This leads to the conclusion that reductions in upward mobility thus appear to follow reductions in access to work opportunities for accumulating work experience. According to David Neumark, p1, when the minimum wage is increased, many low-skill workers retain their jobs and earn higher wages when the minimum wages are raised. On the other hand, there is evidence that in many countries, raising the minimum wage leads to fewer jobs. The low paying jobs requiring low skills are the jobs that are likely to decline with increased minimum wages.
As Douglas in CBO, p 8, notes, increases in the minimum wage would probably reduce the employment for a proportion of low-wage workers. However, it may also increase the family income for a large proportion of the same group. In terms of employment, increases in the minimum wage leads to a reduction in two ways: higher wages leads to an increased cost to the producers for producing goods and providing services. Since the producers do not bear the increased costs alone, they pass the cost to the end consumers through increased prices of goods and services.
Increased prices lead to a decrease in the purchasing power of the consumers and they, therefore, buy fewer goods. The producer is then forced to produce fewer goods due to decreased demand thus requiring few workers. The producer will, therefore, hire fewer workers than before leading to laying-off. This effect is known as the scale effect and it tends to reduce employment to both the low-wage workers and high-wage workers. Therefore, though the speech is advocating for increased wages, it fails to see the other long term effect of such an action, which it should seek to address.
Second, minimum wage increases raise the cost ratio of low-wage workers to other inputs that employers use to reduce goods and services such as machines, technology among others. Some employers respond to this new phenomenon by decreasing their use of the low-wage workers and shifting towards the other inputs. This is referred to as the substitution effect and it reduces employment among the low-wage while increasing it among the high wage workers. It is, however, important to note that, employment dynamics of the low-wage workers varies substantially from one firm to another.
That is, employment will tend to fall more in firms whose customers are sensitive to price increases than those who are not sensitive. Prices increases will, therefore, alter the demand for the products that is reduced demand, as prices rise forcing the firms to cut down on their production more than the other firms. Employment also falls more on firms that easily substitute other inputs for low-wage workers and in situations where the low-wage workers constitute a large proportion of the input costs.

Government Taxes

Tax is a financial obligation placed on the wealth of an individual. There are two types of taxes that is; direct and indirect. Direct taxes are levied directly on individuals and firms and, therefore, the tax burden solely lies on those they are levied at. Direct taxes lead to a larger burden on the rich or high-income earners and less on the low-income earners who have less ability to pay. It plays a major role in inequality reduction in terms of wealth and income. They also do not cause distortions in the allocation of resources as opposed to indirect taxes. However, since people are always aware of their tax liability under the direct taxes, there I a tendency to evade taxes (Thuronyi, p6).
On the other hand, indirect taxes are taxes where the liability does not fall on the person or individual levied at directly. The firm or individual, therefore, pass the liability, either wholly or in part to other parties. For instance, excise duty, customs, and service charges among others.
The progressive tax which is a direct tax is one where the average tax rate increases as the income rises. That is, the rich are taxed more in comparison to the poor. The tax is designed to reduce the income disparity between the high and low-income earners through disproportionately taxing the upper incomes and redistributing the proceeds through the welfare state.
As proposed in the speech, cutting the taxes of the low-income working families would finance quality childcare. This is by cutting down taxes up to $3000 per child per year for middle class and low income families with young children in America (www.forbes.com). It is also evident from theory and practice that, reduced taxes reduce the tax liability on the consumers. This will avail more money to purchase goods and services thereby enhancing their purchasing power. Access to more goods and services will uplift their living standards.
In addition, as highlighted in the tax proposal, small inherited families are exempted from taxes. The proposal highlights that small family owned businesses would be exempted from capital gains tax. This exemption will hold at the time of death and until the business is sold.

Works Cited

Neumark, David, and William L. Wascher. Minimum Wages. Cambridge, Mass.: MIT, 2008. Print.
Web. 24 Apr. 2015. <http://wol.iza.org/articles/employment-effects-of-minimum-wages-1.pdf>.
Web. 24 Apr. 2015. <http://cbo.gov/sites/default/files/cbofiles/attachments/44995-MinimumWage.pdf>.
Clemens, Jeffrey, and Michael Wither. The Minimum Wage and the Great Recession: : Evidence of Effects on the Employment and Income Trajectories of Low-skilled Workers. 2014. Print.
Thuronyi, Victor. Tax Law Design and Drafting. Washington, D.C.: International Monetary Fund, 1996. Print.