Minimum Wage as a Price Floor
The minimum wage is a debated policy example of a price floor.
A price floor is a minimum allowable price intended to maintain a minimum income level for workers.
Basic Economic Theory
Graphical Representation:
X-axis: Quantity of Labor
Y-axis: Price of Labor (Wages)
Demand Curve: Downward sloping (from companies hiring workers)
Supply Curve: Upward sloping (workers selling their labor)
Equilibrium:
Quantity of labor (Q0) and equilibrium wage (w0) where supply meets demand.
Effects of Setting a Minimum Wage Above Equilibrium
Higher Quantity Supplied (qs): More workers desire jobs at increased wages.
Lower Quantity Demanded: Employers hire fewer workers at these higher wages.
Result: Surplus of Workers (Unemployment) develops as supply exceeds demand.
Winners: Workers who retain jobs at higher wages, transferring some surplus from employers to them.
Losses: Jobs that could have been created at a lower wage are missed due to legal restrictions.
Empirical Research
Studies show little to no immediate decrease in employment following minimum wage increases.
Advocates argue that economic principles vary in the low-skilled labor market.
Counterarguments to Advocates
Historical Context: Past minimum wage increases in the U.S. have been small (e.g., 50¢ per year) and affected only 3-5% of the workforce, limiting observable impact.
Employment Metrics: Research often focuses only on job numbers rather than total hours worked.
Parts of compensation such as uniform costs or reduced benefits may not be reflected.
Adjustment Period
Employment changes predicted by simple models show an immediate drop after a minimum wage increase, which does not reflect complexity in real situations.
Adjustment may instead be gradual, where businesses adapt slowly (e.g., reducing hours or changing operational methods).
Research Findings
Studies (e.g., research by Jeremy West) identified that high minimum wages result in slower job growth, with fewer positions being available, rather than immediate job losses.
Importance of low-wage jobs: Provide essential skills and experiences necessary for upward mobility in the job market.
Demographics of Minimum Wage Workers
Notably, many minimum wage earners are teenagers from middle/upper-class families, which contrasts with the intent of aiding low-income, low-skilled individuals.
Minimum wage policies act as a blunt instrument, affecting various socioeconomic groups without discrimination.
Consequences for Marginalized Groups
High school dropouts and minorities are disproportionately affected by minimum wage policies, suffering from the negative employment effects.
Wishful thinking regarding minimum wage impacts does not alter economic principles; careful policy consideration is essential.
Additional Material
There is a debate available for further insights: James Galbraith vs. the speaker on whether a $15/hour minimum wage is beneficial for Texas.
Recommended for those interested in a deeper dive into minimum wage discussions.
Minimum Wage Economic Theory
Minimum Wage as a Price Floor
The minimum wage is a debated policy example of a price floor.
A price floor is a minimum allowable price intended to maintain a minimum income level for workers.
Basic Economic Theory
Graphical Representation:
X-axis: Quantity of Labor
Y-axis: Price of Labor (Wages)
Demand Curve: Downward sloping (from companies hiring workers)
Supply Curve: Upward sloping (workers selling their labor)
Equilibrium:
Quantity of labor (Q0) and equilibrium wage (w0) where supply meets demand.
Effects of Setting a Minimum Wage Above Equilibrium
Higher Quantity Supplied (qs): More workers desire jobs at increased wages.
Lower Quantity Demanded: Employers hire fewer workers at these higher wages.
Result: Surplus of Workers (Unemployment) develops as supply exceeds demand.
Winners: Workers who retain jobs at higher wages, transferring some surplus from employers to them.
Losses: Jobs that could have been created at a lower wage are missed due to legal restrictions.
Empirical Research
Studies show little to no immediate decrease in employment following minimum wage increases.
Advocates argue that economic principles vary in the low-skilled labor market.
Counterarguments to Advocates
Historical Context: Past minimum wage increases in the U.S. have been small (e.g., 50¢ per year) and affected only 3-5% of the workforce, limiting observable impact.
Employment Metrics: Research often focuses only on job numbers rather than total hours worked.
Parts of compensation such as uniform costs or reduced benefits may not be reflected.
Adjustment Period
Employment changes predicted by simple models show an immediate drop after a minimum wage increase, which does not reflect complexity in real situations.
Adjustment may instead be gradual, where businesses adapt slowly (e.g., reducing hours or changing operational methods).
Research Findings
Studies (e.g., research by Jeremy West) identified that high minimum wages result in slower job growth, with fewer positions being available, rather than immediate job losses.
Importance of low-wage jobs: Provide essential skills and experiences necessary for upward mobility in the job market.
Demographics of Minimum Wage Workers
Notably, many minimum wage earners are teenagers from middle/upper-class families, which contrasts with the intent of aiding low-income, low-skilled individuals.
Minimum wage policies act as a blunt instrument, affecting various socioeconomic groups without discrimination.
Consequences for Marginalized Groups
High school dropouts and minorities are disproportionately affected by minimum wage policies, suffering from the negative employment effects.
Wishful thinking regarding minimum wage impacts does not alter economic principles; careful policy consideration is essential.
Additional Material
There is a debate available for further insights: James Galbraith vs. the speaker on whether a $15/hour minimum wage is beneficial for Texas.
Recommended for those interested in a deeper dive into minimum wage discussions.