Posts Tagged ‘Supply and Demand’

Supply, demand and minimum wage

February 24, 2014

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.

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An economics lesson from a kangaroo

August 19, 2013

australia.minimum.wage

This is true, although in terms of purchasing power, the Australian minimum wage for fast-food workers is more like $12 in the United States. Click on Australia minimum wage for details from the Real News Network.

Many economists say, without any empirical evidence, that an increase in the minimum wage will automatically result in increased unemployment.  This is because it is a basic principle of economics that if you increase the price of something, people will buy less of it, and so it is with wages.

Under certain conditions, that would be true.  Fewer people would be hired for minimum wage jobs if, say, the U.S. minimum wage was raised to $72.50 an hour.  But there is no evidence that any of the actual increases in the minimum wage have had any adverse measurable effect on U.S. employment.  Indeed, the number of minimum wage and near-minimum wage jobs has increased dramatically since 2007-2009, when the minimum wage was increased from $5.15 to $7.25 an hour.

The basic concept of economics—that the law of supply and demand describes how people respond to economic incentives—is true as far as it goes.  This concept has such beauty and explanatory power that it is easy to forget the other dimensions of human behavior.   Economists who forget this wind up like the physicist in the joke, who could infallibly predict the outcome of horse races, provided there were spherical horses racing in a vacuum.