3/13/2007

Minimum Wage Increase May Not Cause Inefficiency

CNN (http://www.cnn.com/2007/POLITICS/02/16/minimum.wage.ap/index.html) and other news sources have reported on the House and Senate passing a bill that would increase the minimum wage from $5.15 to $7.25 over the next two years. Minimum wage is clearly a price floor, which can cause an inefficiency in the market if it is set above the free-market equilibrium. I do not think the minimum wage increase will affect the market equilibrium. Most people in the lowest income bracket are already being paid above minimum wage. Even companies in Cedar City -- like Smead, Convergys, etc -- who primarily hire unskilled individuals without a college education, are paying above minimum wage. Also, many states have higher minimum wages -- also called living wages. I don't think the increase to $7.25 exceeds the free-market equilibrium and should not cause excess supply of labor. I think that the only companies that may see an excess supply of labor and a higher labor cost is fast-food restaurants, which primarily hire high school students at the minimum wage.

6 comments:

Eric said...

Sorry Kim but I disagree. While such companies as Smead and Convergys do pay higher than minimum wage I think there is more to the puzzle. Why do companies pay higher than the minimum wage? Because the labor supply market is such that they can’t find an adequate amount workers at low wages. Smead has to pay more than McDonalds because of several possible reasons, one you almost have to have a car to get to Smead, two you have to be quite efficient in English at Smead, three you have to have a more open schedule at Smead, four you have to be able to remember more and perform better at Smead. Now I have never worked at either place, so I don’t really know all the differences but all the same there are differences and that’s why Smead pays more than McDonalds. Now if the minimum wage is raised at McDonalds to say $7.25 an hour a wage more comparable with Smead, we start to see those marginal workers shift their place of employment from Smead to McDonalds. Thus the market for labor supply has been altered and Smead once again is required to raise wages. Minimum wage from an economic standpoint hinders the labor market and takes freedom and efficiency away from the people.

Sebastian said...

I think that Eric has a good point. Once the minimum wage kicks in, we may see employees changing jobs and I agree that some business may have to raise their wages to keep employees. I also think that if these businesses have to raise wages, either to meet the minimum wage requirement or to keep employees, they will in turn, increases prices. The businesses may not be able to take on the extra costs and will pass them on to the consumer. Thus, we will end up paying more for goods.

Dr. Tufte said...

-1 on Kim for grammatical errors and a poorly formatted link.

I think Kim is probably right this time around. In general, I'm not in favor of a minimum wage at all, or even raising it because of the problems she outlines, but I'd have to say that if there is a time when we can get away with it that this is probably it. Even so, I think the criticisms of Eric and Sebastian are worth considering.

Trinity said...

Dr. Tufte's assessment is right. If a price floor isn't binding, it doesn't even need to be considered at all. Also, manufacturing jobs pay much more than minimum wage. I doubt these people are going to move from $10/hour to a fast food job at minimum wage.

Dr. Tufte said...

And ... we don't seem to have had any ill effects from this.

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