Answer :

Many economic analysts disparage the minimum wages as a policy tool, and yet minimum wages not only persist, they need has to been raised in numerous jurisdictions in these recent years. In this paper, we investigate the forces that drive wage movements in an effort to know what lies behind this widely popular policy tool.

We do so out of direct interest in the minimum wage but also in the expectation that examining a policy that seemingly touches so few people directly but is so widely supported will provide some unique insights into the forces governing the setting of redistributive policy parameters generally . Studying minimum wage setting is also interesting because the minimum wage is typically treated as exogenous in studies of institutional impacts on inequality and of the elasticity of labour demand. Our results will also allow us to assess that assumption.

It is interesting to think about the wage setting in light of the behavioural economics literature on fairness. Many contributions therein literature argue that models based solely on self-interest (as within the political competition model just described) don't match results from experiments during which individuals divide up goods or money (see Fehr and Schmitt(2006) for a review). This has led the researchers to propose alternative models of distribution decisions. For example, Charness and Rabin(2002) present the experimental results which support the existence of “charity” social preferences during which individuals place positive weight on outcomes for those worse off than themselves.

But their results are (and those in other papers referenced in Fehr and Schmitt(2006)) also indicate support for what Fehr and Schmitt call “strong reciprocity” based social preferences. Of particular interest for us are leads to Fehr and Fischbacher(2004) indicating that experiment participants are willing to pay a price to punish people that are seemed to have acted unfairly even when the respondent may be a third party who isn't directly involved within the transaction in question. From this result, it is only a small step to the hypothesis that societies may express such preferences in policies designed to punish or ban behaviour deemed to be unfair or greedy. In more direct terms, policies could also be expressions of societal notions of justice also as (or, perhaps, instead of) reflections of self-interest or charity. We present a 3rd model of wage setting based upon this hypothesis.

Wage Determination:
The Expected Price Level:

Both the workers and the firms care about real wages (W/P), not nominal wages (W).

• Workers don't care about what percentage dollars they receive but about what percentage goods they will buy with those dollars. They care about W/P.
• Firms don't care about the nominal wages they pay but about the nominal wages, W, they pay relative to the worth of the products they sell, P. They also care about W/P.

The Unemployment Rate:

Also affecting the mixture wage is that the percentage , u. If we expect of wages as being determined by the bargaining, then the higher unemployment weakens workers’ bargaining power, forcing them to simply accept the lower wages. Higher unemployment allows firms to pay lower wages and still keep workers willing to figure.

The Other Factors:

The third variable, z, may be a catchall variable that stands for all the factors that affect wages, given the expected price index and therefore the percentage . Unemployment insurance is the payment of unemployment advantages  to the workers who lose their jobs.

Price Determination:

• The production function is that the relation between the inputs utilized in production and therefore the quantity of output produced.
• Assuming that firms produce goods using only labor, the assembly function are often written as:

Y=AN
Y = output
N = employment
A = labor productivity, or output per worker

The Natural Rate of Unemployment:

• In this section we'll check out the implications of wage and price determination for unemployment.

Let’s assume that nominal wages depend upon the particular price index , P, instead of on the expected price index , .
W=PF(u,z)
(-,+)
Wage setting and price setting determine that the equilibrium rate of unemployment.

The Natural Rate of Unemployment:
The Wage-Setting Relation:

• Since Pe equals P, then:

W = PF(u,z)

We can divide each side by the worth level:
W/P=F(u,z)
(-,+)

This relation between the important wage and therefore the rate of unemployment—wage-setting relation.

The Role of Structural Reforms

• From the above analysis it's clearly emerges what will follows:
• Labour market reforms aimed toward reducing the market power of trade unions and at increasing efficiency tend to decrease the natural level of unemployment then to extend the natural level of output;
• Pro-competitive reforms within the goods markets tend to decrease the natural level of unemployment then to extend the natural level of output;
• Structural reforms aimed toward improving the general productivity of the economy (i.e. more efficient PA, reduction of red-tape burden, more friendly business environment etc…) tend to decrease in the natural level of unemployment and to increase in the natural level of the output.