UBI or the minimum wage?
Note. Figure 2, showing the effect on demand for labour of a rise in minimum wage in an economy with low PED (graph a) and high PED (graph b) of labour. From Microeconomics: Theory Through Applications. (https://saylordotorg.github.io/text_microeconomics- theory-through-applications/). Copyright 2011 by Saylor Foundation.
In figure 1, the increase in unemployment is very large, but if the modular (modular means positive) gradient of the demand line was higher, then a larger increase in minimum wage would cause a smaller drop in employment. Figure 2 shows this: in graph (a) where the demand line is relatively flat a small increase in the minimum wage has a large impact on demand for unskilled labour, whereas in graph (b) a steeper demand line means there is a smaller drop in labour purchased as a result of the same price rise. The gradient of the demand and supply lines are determined by the PED (Price Elasticity of Demand) and PES (Price Elasticity of Supply) of the product being depicted, in this case labour (PED and PES are the amount demand/supply for a product change relative to a change in its price), with the gradient of the demand line being 1/PED and the supply line 1/PES. The net welfare (pay) to unskilled workers (known as the wage bill) only increases if the modular PED is less than one. PED and PES are calculated using the following formula: PED/PES = % change in Quantity (demanded or supplied)/% change in price (Cooper and John, 2012). While this equation makes it very easy to calculate the PED and PES of anything after a change in price has been introduced, calculating them before is considerably harder. Since a trial cannot be conducted on a product like labour, economists usually attempt to calculate these elasticities through a combination of empirical evidence and by seeking to predict people’s reactions to changes in market conditions. While there are a range of results, there is a general acceptance that teenage unskilled labour (the main group effected by the minimum wage) has a PED between -0.1 and -0.3 in developed countries, with adult unskilled labour slightly lower (Nuemark and Wascher, 2008) (the PED of most products is negative since demand decreases with an increase in price, but the – sign can essentially be ignored). This means that if we take -0.2 as an average PED, a 10% increase in minimum wage would
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