An important topic that affects both employees and employers is the topic of minimum wage. It has recently become a big topic of discussion as governments consider raising minimum wage to as high as $15 per hour. There are many arguments for minimum wage law, but most arguments support one goal - to assist those individuals who make below poverty level wages and are socio-economically considered “poor”. Another argument states that with the productivity increase of our current work force and the increase in average wage rates should result in an increase in minimum wage. While compelling arguments can be made in favor of minimum wage, the question is whether or not minimum wage is producing the desired results. Ultimately, the answer is “no”.
In 2004, Paul Kersey (an economics major from the University of Michigan-Dearborn, lawyer, labor policy analyst, and former Bradley Visiting Fellow at the Heritage Foundation) gave a testimony to the House of Representatives regarding economic effects of minimum wage on society. While the data referenced is outdated, the underlying principles are basic laws of economics and remain in force today. Minimum wage creates a price floor that results in a shortage of jobs. In his testimony he indicates that the elasticity of demand for labor is -0.5, which means a 10 percent increase in minimum wage results in a 5 percent decrease in jobs. Other compelling arguments against minimum wage include: limiting employment options for teenagers and individuals lacking in employable skills; enticing illegal immigrant workers to our labor force which take jobs away from US citizens; and, variations in cost of living makes minimum wage irrelevant in some areas.
The topic of minimum wage affects all other markets because minimum wage directly impacts income levels, which is a demand shifter, and input price, which is a supply shifter. By driving up minimum wage with a price floor and forcing higher income levels, businesses must compensate for the higher input cost by decreasing supply of goods. This causes the supply curve to shift to the left decreasing quantity and increasing price. The increase in income simultaneously shifts the demand curve to the right for normal goods and causes a further increase price. In summary, an increase in minimum wage causes a price increase in most other markets.
The market has a natural ability to find an equilibrium point that satisfies both consumers and producers. The same principle holds true in the labor market. While the minimum wage law was enacted with good intentions, the law cannot stop or alter the natural forces of a free market economy.
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