GED Social Studies TestEconomicsMedium
A government implements a minimum wage increase from $7.25 to $10.00 per hour. Which of the following is a potential short-term consequence of this policy, according to basic economic principles?
- AAn increase in the overall demand for labor across all industries.
- BSome businesses may reduce staff or slow hiring to offset increased labor costs.
- CA significant decrease in consumer prices due to increased worker purchasing power.
- DA decrease in the supply of goods and services.
Show answer & explanationAnswer & explanation
Correct answer: B. Some businesses may reduce staff or slow hiring to offset increased labor costs.
When the minimum wage increases, labor becomes more expensive for businesses. To maintain profitability, some businesses may respond by reducing their workforce, slowing hiring, or substituting capital for labor, leading to potential job losses or slower job creation.
Why the other options are wrong
- A. An increase in minimum wage typically decreases the demand for labor as it becomes more expensive.
- C. Increased labor costs are more likely to lead to higher, not lower, consumer prices, or at least no significant decrease.
- D. While some businesses might scale back, a direct decrease in the overall supply of goods and services across the economy is not the most immediate or direct short-term consequence.
Minimum Wage
The lowest hourly wage an employer can legally pay to workers.
- Set by government to ensure a basic standard of living.
- Can lead to debates about employment levels and inflation.
- A form of price floor in the labor market.
Memory trick: Higher wages can help some, but pinch others.