Supply, demand and minimum wage

One of the big arguments against raising the minimum wage is based on an over-simple understanding of the law of supply and demand  — that if employers have to pay higher wages, they’ll hire fewer workers.

If that were true, then the long-term decline in the minimum wage and in median workers’ wages (adjusted for inflation, which you should always do) would have resulted in full employment.  Obviously this hasn’t happened.

A rational employer will hire as many workers as necessary for the profitable operation of the business, and no more.  The law of supply and demand sets limits.  The employer will not pay so much that he can’t operate profitably, nor so little that nobody will work for him.  But, as is shown by the difference between Costco and Walmart, there is a broad range between those two limits.

Suppose I have a franchise to operate a McDonald’s restaurant.  I would not raise wages to the point where higher costs forced me to charge more for a hamburger than the Burger King restaurant across the street.  But if the minimum wage was raised for both of us, we could pay higher wages and still be on a level playing field.

In theory, minimum wage could be raised to the point where I charged more for hamburger than people were willing to pay.  But there is no evidence that this has ever happened with minimum wage in the United States.

One economist, for example, compared employment in adjoining counties of adjoining states with different state minimum wages.  There was no evidence of any difference in unemployment rates or job availability.

A higher minimum wage could have a positive effect on employment.  If low-wage workers have more money to spend, there is a greater demand for goods and services, and could result in new hiring.



Here are some useful links on the economic impact of minimum wage.

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2 Responses to “Supply, demand and minimum wage”

  1. whungerford Says:

    If we wish to raise people not just to the poverty level but well above it as we should, a large increase in the minimum wage as well as other measures are needed. One such would be to stop counting servers tips as income; another would be to end employers using part-time workers to escape paying benefits.


  2. Alex Says:

    Changes in the minimum wage do next to nothing. Wealth and liquidity are not the same thing. Raising the minimum wage only increases the liquidity of the perceived value of an hour’s work. Workers are not getting paid for an extra 20-25 minutes worth of work, rather the value of their hour is being divided into 1010 individual units of liquidity rather than 725 units. The people this will hurt the most are individuals whose hour is valued between 1010 and 726 units of liquidity, since their additional ‘worth’ beyond that base hour is erased.


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