Answer to Question #65461 in Economics of Enterprise for mirza

Question

How does the minimum wage affect
employment in these fast-food restaurants?
Draw a graph to show what has
happened, and estimate the effects on
employment in the fast-food sector.

Answer 1

It is important to mention that there can be different scenarios and I am representing a basic one. Sector and individual firm act in the same way. The main purpose is that when minimal wages grow than follows the decrease of the firm’s costs. The later causes decline of the demand in this sector which brings to the cut of the incomes of the sector. In this conditions firm have no choice than cutting their costs by firing workers, which decrease the employment in the sector.
This process has been described in the following picture.