How Does Minimum Wage Affect the Economy?

Hello my name is Arielle Reid in Budapest, Hungary and I will discuss how minimum wage affects the economy. Now in a very general sense minimum wage can be understood as an artificial setting of the cost of labor. Now when the cost of labor goes up what ends up happening is you get an increase in the cost of production. So if instead of making one dollar an hour, I'm making two dollars an hour. Well the cost besides the material and the other equipment being used of making sweaters lets say, goes up by one dollar because minimum wage has gone up one dollar. An increase in the cost of production produces an increase in the cost, the overall cost of the product. Now with an overall increase in the cost of the product, you can have two very different, you can have two similar but different scenarios. Number one you get less profit because people buy less of the profit.. people buy less of the commodity because it's more expensive or two you get less profit because the producer ends up absorbing the higher costs. Now when the producer absorbs that higher cost, there's less money to reinvest in his business to help it grow to increase productivity. And for this reason there are some people that believe that a minimum wage or an increase in minimum wage is bad for the economy, the growth of the economy and slows it down. But there are certain situations where instituting a minimum wage is actually beneficial. So in a situation where labor costs are being sold below market price, what they call a monopolistic labor market. A minimum wage used effectively can actually help increase productivity. And actually help the economy to grow. But all this points to one thing. It's that labor markets so minimum wage and the way that the market responds to minimum wage is not a simple supply and demand model. There are always sectors of production that aren't touched by minimum wage legislation. Self employed workers, in some service industries like farming, and some other protected industries the minimum wage legislation doesn't extend. Which means that you are not dealing with one big large labor market, you are dealing with two labor markets that respond very differently, one that has a minimum wage legislation and one that doesn't. Thus minimum wage legislation in one sector will also affect production and consumption of products in the other sector. So once again minimum wage labor markets aren't a simple supply and demand equation like outlined here. However, getting the basics down will help you understand the more complex dynamics of politics, minimum wage legislation and the economy.