In economics, what happens to employment if wage is increased for it's employees
The impact of increasing wages on employment is a subject of debate among economists. There are a few different perspectives and theories on this matter:
1. Classical economists argue that increasing wages can have negative effects on employment. According to the classical theory of labor market, an increase in wages above the equilibrium level (the wage rate that balances labor supply and demand) can lead to a decrease in the quantity of labor demanded by employers. This is because higher wages increase labor costs for firms, making it more expensive to hire workers. Consequently, firms may reduce their demand for labor, leading to unemployment or reduced hiring.
2. Keynesian economists, on the other hand, believe that increasing wages can have positive effects on employment. According to Keynesian theory, higher wages can stimulate aggregate demand and increase consumption. When workers earn more, they tend to spend more, which can boost economic activity and lead to increased demand for goods and services. This, in turn, can create job opportunities and reduce unemployment.
3. Some economists argue that the impact of wage increases on employment is context-dependent. In industries where labor costs are a significant portion of total costs, such as low-skilled labor-intensive industries, increasing wages may lead to reduced employment. In contrast, sectors with higher profit margins or where labor costs constitute a smaller share of total costs may be more able to absorb higher wages without significant job losses.
It is important to note that the actual impact of wage increases on employment is influenced by various factors, including the state of the economy, labor market conditions, productivity levels, worker skills, and the elasticity of labor demand. Consequently, the relationship between wage increases and employment is complex and does not have a one-size-fits-all answer.
When wages are increased for employees in an economy, there are potential effects on employment. However, the actual impact can vary depending on the specific circumstances and context. Here are the main theories and considerations to understand:
1. Substitution effect: According to the substitution effect theory, an increase in wages may encourage workers to supply more labor because it becomes more financially attractive. This could lead to an increase in the quantity of labor supplied, potentially creating more job opportunities.
2. Income effect: The income effect theory suggests that an increase in wages can increase workers' purchasing power, thus boosting overall demand in the economy. This increased demand can lead to businesses expanding their operations, resulting in more employment opportunities.
3. Cost-push effect: On the other hand, some economists argue that higher wages can increase production costs for businesses. This may incentivize employers to reduce the quantity of labor demanded, which could entail layoffs or a reduction in hiring. Some argue that this could particularly impact businesses with narrow profit margins or facing strong competition.
4. Automation and technology: Another factor to consider is that when labor costs increase, companies may seek alternative ways to perform tasks, such as automation or investment in equipment and technology. This can lead to job displacement as workers are replaced by machines.
5. Industry-specific effects: The impact of wage increases on employment can also vary across industries and sectors. Industries with a higher proportion of labor costs, such as service industries, may be more sensitive to wage increases compared to those with lower labor costs, such as capital-intensive industries.
It is important to note that the impact of wage increases on employment is a complex and debated issue. Empirical studies and real-world examples often yield mixed results, making it difficult to draw definitive conclusions. The specific circumstances, market conditions, and policy interventions in a particular economy will influence the actual employment outcomes.
In economics, the effect of increasing wages on employment is a topic of much debate among economists. There are two main theories that explain the potential impact: the neoclassical view and the Keynesian view.
1. Neoclassical View: According to the neoclassical view, increasing wages may lead to a decrease in employment. This is based on the assumption that the labor market operates under the principles of supply and demand. If wages increase, it becomes more expensive for businesses to hire workers. As a result, businesses may reduce their demand for labor and hire fewer employees, leading to a potential decrease in employment levels.
To understand the impact of increasing wages on employment according to the neoclassical view, economists often analyze the concept of elasticity of labor demand. If the demand for labor is elastic, meaning it is responsive to changes in wages, then a wage increase could result in a relatively larger decrease in employment. Conversely, if the demand for labor is inelastic, meaning it is less responsive to wage changes, then the impact on employment may be less significant.
2. Keynesian View: The Keynesian view offers a different perspective. According to this view, an increase in wages may have positive effects on employment. The rationale is that when employees earn higher wages, their purchasing power increases, leading to higher consumer spending. This increase in consumer demand can stimulate businesses to expand their production and hire more workers to meet the rising demand. In this way, a wage increase can potentially boost employment levels.
To determine the actual impact of increasing wages on employment, economists often rely on empirical studies, which examine real-world data and historical trends. These studies analyze various factors, such as labor market conditions, industry characteristics, and macroeconomic conditions, to evaluate the relationship between wage increases and employment.
Ultimately, the impact of increasing wages on employment is complex and can vary depending on several factors, including the specific economic context, labor market conditions, and the elasticity of labor demand. It is important to note that this explanation provides a general overview of the theories and factors involved, but the actual impact can be more nuanced and may differ in different situations.