## Question

In Stenland, many workers have been complaining that they cannot survive on minimum wage, the lowest wage an employer is permitted to pay. The government is proposing to raise the minimum wage. Many employers who pay their workers the current minimum wage argue that if it is raised, unemployment will increase because they will no longer be able to afford to employ as many workers.

Which of the following, if true in Stenland, most strongly supports the claim that raising the minimum wage there will not have the effects that the employers predict?

(Because of copyrights, the complete official question is not copied here. You can access the question here: GMAT Club)

Difficulty: Medium

Accuracy: 71%

Based on: 7660 sessions

## Solution

### The Story

In Stenland, many workers have been complaining that they cannot survive on minimum wage, the lowest wage an employer is permitted to pay. Many workers have been complaining about the minimum wage in the country. They find that the minimum wage is too low – they can’t survive on it.

The government is proposing to raise the minimum wage. The government plans to raise the minimum wage.

Many employers who pay their workers the current minimum wage argue that if it is raised, unemployment will increase because they will no longer be able to afford to employ as many workers. – Many employers who pay their workers the minimum wage have an issue with the government’s proposal. They argue that if the minimum wage is raised, they will not be able to afford to employ as many workers, and therefore unemployment will increase.

Gist

1. Workers are unhappy with the current minimum wage. They complain that they cannot survive on it.
2. The government is proposing to increase the minimum wage.
3. Employers who pay the minimum wage have raised a concern against the government’s proposal. They argue that increasing the minimum wage will lead to increased unemployment. Because with a higher minimum wage, they will not be able to employ as many workers.

Gaps in the employers’ logic

1. Don’t the employers have margins to afford to pay a higher amount as salaries and wages to their employees?
2. Even if these employers (those who pay their workers the current minimum wage) can’t afford to pay higher salaries, can’t these workers get jobs with other employers?
3. Could better wages translate into higher motivation for employees, and thereby higher revenues for the employers? If so, that higher revenue could offset the higher costs, and the employers could afford to pay the higher wage to all workers.

## Question Stem

Which of the following, if true in Stenland, most strongly supports the claim that raising the minimum wage there will not have the effects that the employers predict?

The question stem has the phrase ‘most strongly supports’. Let’s be clear about what exactly we need to support.

We need to support a claim – the claim that raising the minimum wage will not have the predicted effects.

What are the effects that these employers predict?
1. These employers will no longer be able to employ as many workers as they currently do.
2. As a consequence, unemployment will increase.

Framework: We need to support the notion that raising the minimum wage will not lead to lower affordability to employ workers, and, as a consequence, unemployment will not increase.

Correct

Selected by: 71%

‘Living wage’ is a new term. I understand the term to mean a wage on which an employee can live (survive).

The passage mentions that “many workers have been complaining that they cannot survive on minimum wage”. i.e., currently, workers cannot survive (live) on minimum wage. So, I’m thinking that the current minimum wage would be lower than a living wage.

If the wage for a position is lower than the living wage, as is the case with minimum wage jobs, employers have an additional cost associated with finding and retaining employees.
Thus, employers who hire minimum wage workers would currently be bearing this cost.
In fact, according to the answer choice, this additional cost is equivalent to the cost they would need to bear if minimum wages were increased.
So, if the minimum wage is raised, i.e. if the employers start paying the workers a higher wage – one that’s closer to a living-wage, the cost associated with finding and retaining employees would go down. Overall, the additional cost in payroll would be offset (at least to an extent) by the reduction in the cost of finding and retaining such employees.
Thus, this answer choice supports the claim that raising the minimum wage will not have the predicted effects.

Note:

1. Many students wonder if we can assume ‘living wage’ to be the same as ‘current minimum wage’. Interestingly, many themselves point out that if the two are the same, how can any position have wages below a living wage?
I don’t think that the two terms refer to the same wage. That would not make sense, since employers are not permitted to pay wages below the minimum wage. Plus, there is no reason to believe that the word ‘living’ implies ‘minimum’. As I’ve explained above, I think ‘living wage’ means a wage needed to live (survive).
2. A flawed reason I’ve come across for rejecting this answer choice is: What if workers are desperate to get any job, and they don’t cause issues related to finding and retaining employees even if they earn the minimum wage?
The question stem states “Which of the following, if true in Stenland, …”. So, we have to accept the answer choices as true. Our job is not to check their validity. Our job is to accept them as true, and then check whether they support the claim. The answer choice states that the cost associated with finding and retaining employees is the same as the additional payroll cost employers would need to bear if minimum wages are increased. I’m not going to question now whether these costs are the same or not.

Incorrect

Selected by: 6%

Statement: Raising the minimum wage does not come with an additional cost for the employers (contribution to employee benefits).

Had raising the minimum wage come with an additional cost, I’d believe even more that the effects the employers predicted will actually happen.

By that logic, if raising the minimum wage is not associated with a particular additional cost, I do believe a little bit less that the predicted effects will actually happen. However, the shift is very marginal. The employers claim that raising the minimum wage itself will increase the costs so much that they’ll need to let go of some workers, and thus unemployment will increase. So, the situation, according to the employers, would already be bad if minimum wages are increased. This option just indicates that the situation is not worse than what the employers think.

Incorrect

Selected by: 11%

“When inflation is taken into account” essentially refers to purchasing power.

Two different minimum wages at two different points in time are being compared in this answer choice.

1. Purchasing power of the proposed minimum wage – today.
2. Purchasing power of the current minimum wage – back when it was introduced.

Say,

1. the current minimum wage is $7, and it was introduced 10 years ago 2. the proposed minimum wage is$10, and it will be implemented this year

So, according to this answer choice, people could buy more with $7 ten years ago than they can buy with$10 today.

As far as the employers are concerned though,

1. Say there are 1000 workers who earn minimum wage.
2. The employers are currently paying $7 as minimum wage – that’s a total of$7,000 dollars.
3. If the minimum wage were increased to $10, the employers would need to pay$10,000 instead of $7,000 to these 1000 workers. 4. That’s the issue here. Employers claim that this$3,000 increase would be too much. They can’t afford to pay $10,000 to these workers. And they claim that because of this, they’ll need to let go of some workers. And thus, unemployment would increase. How much people could buy with$7 ten years ago, and how that compares with how much they can buy with \$10 today is irrelevant to the employers’ point.

Incorrect

Selected by: 3%

If this were the case, then perhaps the employers would face an even more serious financial crunch. I’m thinking that if some other employees also need to be paid higher wages, the employers would find it even more difficult to be able to afford to employ as many workers.
This answer choice weakens the claim.

Incorrect

Selected by: 10%

First off, what does the statement mean?

Many companies that employ some workers who earn the minimum wage, also have workers who earn wages that much higher. Maybe they have more experience or are more qualified.

If the minimum wage is increased, the current minimum-wage-workers would need to be paid a higher amount. The issue is that can the employers afford to pay that higher amount?

• This answer choice does not indicate that the employers can compensate for the minimum wage increase by reducing the wages of the higher-paid guys. Think about it. Is it common that senior employees’ salaries are reduced when companies hire freshers at higher salaries than before?
• It also does not indicate that because they are already paying higher wages to some employees, they can afford to increase wages for the minimum-wage-workers. Say they are paying higher wages to the supervisors. Does that mean they can afford to pay higher wages to the entry-level staff too? That would depend on how much funds the employers have, and not on how much they pay other employees, no?

No impact.

If you have any doubts regarding any part of this solution, please feel free to ask in the comments section.

## Anish Passi

GMAT Coach

With over a decade of GMAT training experience, top 1 percentile scores on the CAT and GMAT, and a passion for teaching, I’d like to believe I am quite qualified to be a GMAT coach. GMAT is learnable, and I help students master the GMAT through a process-oriented approach based on logic and common sense. I offer private tutoring and live-online classroom courses. My sessions are often sprinkled with real-world examples, references to movies, and jokes that only I find funny. You’ve been warned 🙂