Running head: NEOCLASSIC ECONOMICS 1

Low-wages Despite the Reduced Unemployment Rates

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NEOCLASSIC ECONOMICS 2

Low-wages Despite the Reduced Unemployment Rates

Neoclassical economists try to explain the pricing, production, income distribution, and
consumption of products and services through demand and supply. They integrate the cost of production
model from classical economics with the ideology of utility marginalization and maximization. Ideally,
neoclassical economic is concerned with efficient resource allocation of scarce and limited resources.
Further, it considers the growth of resources in the long-run, which allows for the expansion of products
and services. In the United States, the economy has been noted to grow, but many low-wage employees
have been left behind (Escobari, 2020). The country's decreasing unemployment need to augur prosperity
for America's employees. The growth and gains are actual in aggregate. However, they hide the long-run
changes under the surface, which tempts to split the labor force and trap low-wage employees. Besides,
their chances of advancing through professional changes are constrained. Notably, low-wage employees
are more likely to remain stagnant in the earnings bracket when the switch trades. Nevertheless,
employees in the middle class are also expected to drop down on the occupational ladder rather than up.
Often, low-wage work is characterized by erratic schedules, is precarious, unsteady employment, and
reduced benefits. Weak unions and the industries' growing concentration erode the employees' ability to
redress labor concerns and bargain for high wages.
American institutions have not responded with the efficacy and urgency needed to address the
challenge. Federal government investments in training initiatives have been meager. Currently, workforce
development funding has been cut to a fifth of what was being spent in the 70s. The absence of
investment has left the reskilling infrastructure and education available to few, benefiting those who have
succeeded in navigating the labor market. To upgrade the prospects of low-wage employees calls for
much more than wage uptick and hot business cycle. Remedies require systems and community-based
approaches (Sackrey, Schneider, & Knoedler, 2016). Reskilling institutions may lean on the historical
paths of upward trade-trade transitions to tailor initiative and satisfy the vulnerable people's needs. For
instance, office machine repairers and financial clerks, two trades that are slowly declining, provide a
potential path to computer system administrators. This is a high-paying job and on-demand. Thus, an
organization can use identical in-house information to improve or target reskilling initiatives, resulting in
promising careers. There is also the need for new social scaffoldings to help employees during rapid
displacement phases.

An increase in employees' wages would translate to an increase in spending. Low-wage

employees are likely to spend a higher proportion of their extra income (marginal propensity to consume).
This might lead to a multiplier effect characterized by high expenditures, thus causing knock-on
implications to other sectors of the economy. Ultimately, the economy would grow (Stilwell, 2012). From
an economics standpoint, the positive spillovers associated with the skilled and upwardly flexible labor
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force can be noted to substantiate the importance and role of public policies. The growing economy needs
to encourage people to act instead of shirking responsibilities. Labor market policies have proven to
increase both employment and wages when the economy is growing. In the event of an economic
downturn has the potential of affecting low-wage employees with severity. Regarding the neoclassical
economic theory, government intervention will only translate to inefficiencies in the labor market.
The neoclassical theory shows that flexible wages are critical to the demand and supply of labor
to coincide. This eliminated the surpluses and shortages in the labor market and, at the same time,
determine the wage rate. The model thus gives an idea that market forces, solitarily, establish full
employment. As a result, government policies which attempt to minimize involuntary employment seem
to be unnecessary. Exogenous shocks like minimum wage laws may only result in distortions in prices
and, ultimately, market inefficiencies. Since the market guarantees that the factors of production are paid
according to value, price floors that prevent downward adjustment of earnings, and other barriers such as
social protection institutions and trade unions, for example, indeed reduce social well-being and lead to
unemployment. This is because they interfere with the market processes.
Neoclassical economics bases its reasoning on the fundamental laws of demand and supply. The
model can yield unfavorable results, like low labor demand may result in low earning, particularly for
unskilled employees. Although the government cannot merely overlook the distress that results from low
wages, neoclassical economists hold the view that depending on minimum wages to raise the earnings of
low skilled employees artificially to fight the market as opposed to using its power to provide redress to
those who suffer the outcomes of demand and supply, is dangerous and likely to be ineffective. This is
because the approach is founded on two mistakes.
The first error is that regardless of how powerful one can be, they cannot change supply and
demand laws. By trying to do so, the market will have either excess demand or excess supply. The second
error is concerned with the assigning of responsibility to a group of individuals or individuals. In this
context, it is the employers. Neoclassical economics contend that it is the unknown market forces which
set the equilibrium levels. Thus, the reasons for equilibrium changes lie in the market, not specific actors
(employers).
To circumvent the effects of low wages in the country, the paper makes one recommendation. To
boost the purchasing power of low-wage earning employees, with no side effects of cutting their
unemployment, their chance of moving to the middle-class earning level, their possibility of moving out
of poverty, is to increase the earned income tax credit (Baker, 2015). It is imperative to note that
increasing wages and minimizing employment rates cancel out. This means that if one of the objectives of
raising the minimum wage is to get them out of poverty, the objective is not attained. An increase in the
wages minimizes the possibility that employees with a low wage will attain a certain level of earning at
NEOCLASSIC ECONOMICS 4

the end of, say, a month. Therefore, increasing wages will minimize the mobility of low-skilled
employees considerably.
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References
Baker, S. E. (2015, October 30). A best way to help low-wage workers? Retrieved from
https://www.bls.gov/opub/mlr/2015/beyond-bls/a-best-way-to-help-low-wage-workers.htm
Escobari, M. (2020, October 20). The economy is growing and leaving low-wage workers behind.
Retrieved from https://www.brookings.edu/blog/education-plus-development/2019/12/19/the-
economy-is-growing-and-leaving-low-wage-workers-behind/
Sackrey, C., Schneider, G., & Knoedler, J. (2016). Introduction to political economy (8th ed.). Boston,
MA: Economic Affairs Bureau.
Stilwell, F. (2012). Political economy: The contest of economic ideas (3rd ed.). Melbourne, MA: Oxford
University Press.