Minimum Wage

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 While the data referenced is outdated, the underlying principles are basic laws of economics and remain in force today.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.

Thoughts for this post taken from the following websites -


Dave Tufte said...

Lyn: 88/100 (repeated singular/plural agreement and/or determinant issues, often involving the phrase minimum wage)

As an economist, I'm willing to admit that if we're politically committed to raising the minimum wage periodically to cover inflation, that we're probably overdue for an increase.

But, as an economist, that doesn't mean I like the concept of a minimum wage, or think it's a good idea. So let me riff a little on the generally sound points Lyn has made.

1) Most people view the minimum wage as an anti-poverty measure. This isn't really true. Most people who earn the minimum wage are not members of poor households: a suburban teenager is more typical. The problem of poor households does not tend to be low wages, but rather low numbers of jobs and/or hours for people in the household. So raising the minimum wage wouldn't do much for the poor.

2) Lyn writes 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". That's a common, but not a good basis, for justifying a minimum wage increase. If productivity has gone up, so will wages. When we see average product go up, but people still being paid the minimum wage, we should instead be asking why productivity has gone up for people at higher wages but not at the lower ones. The answer has to do with skills of individuals, not minimums mandated by the government.

3) It's beyond the scope of this class, but economists can't dismiss results from the data that show that employment is ineleastic with respect to minimum wage changes. Kersey is on the opposite side of that debate, and it's simply not settled.

4) Lyn makes a quick offhand comment that a higher minimum wage might attract more illegal immigrants. The evidence on this is actually very weak. Most immigrants to the US are trying to get away from somewhere else, rather than trying to get to our higher wages.

5) It actually is not that straightforward for even research economists to estimate the effects of minimum wage changes. There are too many other countervailing factors. Personally, I tend to be fairly agnostic on this issue ... the gray area is a lot larger than the typical explanation of price floors would indicate.

Eddie said...
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Eddie said...

Lyn, I strongly agree that raising the minimum wage (or having one at all) should be a big "no!". A minimum wage does not guarantee jobs. It guarantees ONLY that those who get jobs will be paid at least the minimum. Unemployment and higher prices are what comes when the price of labor rises because the government requires it. When wages do rise, businesses adjust by cutting hours, or firing employees and raising the prices for their goods. Generally, businesses end up hiring less, especially those with little to no job experience.

Another way this hurts is the labor force. Suppose you are young, and do not yet have any skills. If your value to a potential employer is much lower than a $15/hour minimum wage, you are not employable. You may be willing to work for $7/hour, but under minimum wage laws it would be illegal for you to do so. A famous liberal economist named Paul Samuelson once said this about minimum wage: “What good does it do a youth to know, that an employer must pay him a minimum wage, if the fact that he must be paid that wage keeps him from getting a job?”.

It is more than just a paycheck too; "minimum wage workers" learn how to deal with a boss, learn responsibility and how to get along with co-workers. Pricing unskilled workers out of the market does them no favors, and does society no favors. I’d make the argument that if these workers don’t find jobs, they find trouble.

The market should dictate what the "minimum" wage should be for an individual, based on their skills.

Dave Tufte said...

Eddie: 50/50

As a professor in this field, I approve of the positions that Eddie is taking.

But, these are based on our theory of how these things work.

At some point though, we need to go out and confront the theory with data.

I'm just as perplexed by this as anyone, but it's my job as a professor to tell you that the implications suggested by theory do not seem to hold that strongly with minimum wages. This isn't a settled debate at all, and it seems to me that conservatives are the one who are dug in to a position on this issue that needs a lighter touch.

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Anonymous said...

Lyn, I too agree that increasing the minimum wage would cause the demand for employees to decrease. This increase will cause employers to cut hours, layoff workers, and even look for higher skilled individuals when hiring. Resulting in a higher unemployment rate. I also do not feel that high school students working in the fast food industry, with little to no experience, deserve a wage of $15 per hour. The Employment Policies Institute suggests that increasing the minimum wage will, “eliminate jobs for low-skilled and entry-level employees”. http://www.bloomberg.com/bw/articles/2014-01-14/seven-nobel-economists-endorse-10-dot-10-minimum-wage

Dave Tufte said...

Susie: 44/50 ("lay off" is the verb you want "layoff" is a noun, "Resulting in a higher unemployment rate" is a sentence without a subject)

OK. I need to steer the economics back on track again.

Susie: I agree with your position that an increase in the minimum wage might decrease employment as a theoretical proposition. But I am also telling you (and the class) that this doesn't mean it's empirically important. To figure that out we'd need to know the slopes, or better yet the elasticities of demand and supply. Yet I rarely have students even bring this up. And the estimates suggest that the effects you're worried about are just not very big.

So everyone, if your reason for being against minimum wage increases is that they will cost some people their jobs, please be aware that have taken a weak position. I don't like that much myself, but I call them as I see them.

Susie made another point that "I also do not feel that high school students working in the fast food industry, with little to no experience, deserve a wage of $15 per hour." The key word there is "deserve". Would we object to those kids getting paid that much if employers were voluntarily choosing to pay that much (because they couldn't hire people otherwise)? Probably not. So it must be that what you object to is not the "deserve-ish-ness" of unskilled students, but having that decision taken away from the person making the hire and paying the wage. That's a much sounder position to take.