The Debate on Economic Effects

The debate on economic effects of minimum wages remains a controversial and heavily researched question. In fact there currently appears to be something of a methodological divide among economists about what minimum wages actually do to economic outcomes. Neo-liberals argue that minimum wage interventions result in a misallocation of labour and lead to depressed wages on the very sectors-the casual and informal urban sectors-where most of the poor are found, with the effect of wasting resources and reducing growth. On the other hand advocates of minimum wage argue that, with the minimum wage legislation, they could redistribute resources in a welfare-enhancing way, and thus creating employment which will alternatively result in the reduction of poverty and an increase in the economic growth. In this essay it is going to be critically discussed whether the argument by the neo-liberals that stated that; “minimum wages will result in job losses”, is true or not with the use of examples of Brazil and some by Card and Krueger to substantiate the argument. Based on my perspective I agree with minimum wage advocates and one would agree with me after reading this essay

Krueger and Card (1995:9) stated that, as the influence of the revisionists waned during the 1960’s an alternative neoclassical view of the labour market rose to prominence. With this shift the consensus view of the minimum wage changed radically. The neo-classics view the labour market is based primarily on deductive reasoning. Krueger and Card (1995:9) assert that the standard model states that, each employee is paid his or her marginal product which is the contribution that that he/she makes to the firms revenue. An example made by Krueger and Card (1995:10) is that assume that a worker is earning $3.50 per hour and contributing the same amount to the firm revenue and the government then imposes a minimum wage of $4.25 which basically becomes unprofitable for the company to employ that worker. In most...