The effects of a Wage Increase
This articledetails of how American Samoa’s economy (a US territory) actually reacted to what is generally considered abstract economic theory. The minimum wage there in 2007 was $3.76 but legislation was passed raising it to $7.25 by July 2009. Many people (2,041 or 12%) are employed by Chicken of the Sea (CotS) canning tuna while another 2,700 are employed by Starkist (CotS’ competitor).
Once the new law was passed, CotS responded by shutting down its plant completely and moving to Lyons, Georgia. It’s not hard to understand why, labor costs doubled providing a competitive disadvantage. The economy was further hurt by a loss to all of the associated industries (shops catering to workers, creating fishing nets, the local bus system, etc). In other words there was a trickle down effect after the new price floor was introduced.
A price floor means that the price of a certain good (in this case labor) is set above what the market would like. The price the same number of workers (supply) can agree to work as the canneries would like (demand). Once the price is artificially raised, two things happen. There is more supply (more workers would like to work at the higher point) while there is less demand (the canneries move out decreasing the number of jobs). Thus there is a surplusof labor making the economy less efficient. Here is a visual illustration from Wikipedia:
The highlighted area is the direct loss to the economy due to this new inefficiency. Another side effect is that the new tier will create a larger discrepancy between classes. Many unskilled laborers will be presented with less opportunity and fall behind while more highly skilled (or luckier) laborers will be paid more. Unemployment will rise and GDP falls. Similar legislation is being discussed in the US so we can expect to see similar affects.