Saturday, May 24, 2008

Minimum Wage Laws


The Minimum Wage

Should we have a minimum wage in the United States?

Most people who support minimum wage laws feel they are necessary to ensure that unskilled workers have enough income to provide for themselves and their families. This is a reasonable societal goal. However, most economists argue that minimum wage laws are a lousy way to achieve that goal. We can use supply and demand analysis to explain why.

Minimum wage laws are applicable in the market for unskilled workers. (Highly skilled workers, such as doctors and lawyers, do not work for minimum wage.) The forces of supply & demand exist in the market for unskilled workers. The price of unskilled workers is the hourly wage that they are paid. At the equilibrium wage, the number of unskilled workers desiring a job equals the number of jobs offered by employers. The concern in this market is that this equilibrium wage does not provide sufficient income for these workers. Minimum wage laws attempt to increase the income of unskilled workers by requiring employers to pay these workers a higher wage than they would in the absence of the law.

What does supply & demand analysis suggest will be the outcome of this policy?

A minimum wage is a type of price control referred to as a price floor. The law does not allow the price to drop beneath the floor. The minimum wage is necessarily above the equilibrium wage. (If it were not, there would be no need for the minimum wage law.) At prices above equilibrium, however, the quantity of unskilled labor supplied (i.e., the number of people willing to work at that wage) exceeds the quantity of unskilled labor demanded (i.e., the number of unskilled jobs offered by employers). Thus, at prices above equilibrium, there is a surplus of unskilled labor. Some of the workers are unemployed (i.e., not working) or underemployed (i.e., not working as much as they would like).

Has the minimum wage accomplished our objective of providing unskilled workers with more income? The answer is "yes" and "no." The unskilled workers who have jobs are better off because they are earning a higher wage. Yet, some of the workers who would have been employed in the absence of the minimum wage law are unemployed with the minimum wage laws. Have we helped these unskilled workers by instituting a policy that provides incentives for employers to reduce the number of unskilled jobs?

Most economists oppose minimum wage laws. They oppose them because they are inefficient at achieving the stated objective. If you support the idea of providing unskilled workers with more income, there are alternatives to the minimum wage that probably are more efficient.

Alternatives to the Minimum Wage

• Give unskilled workers more income. (After all, the problem is that unskilled workers do not have enough income, right?)
• Give unskilled workers in-kind transfers (i.e., provide them with food, clothing, housing, medical care, etc.)
• Provide unskilled workers with education & training (so they can obtain skills). Economists generally like this option. The workers who obtain skills are more productive and consequently earn more income. Education & training also reduces the supply of unskilled workers. (They become skilled workers.) The supply curve for unskilled workers shifts left. Other things equal, the new equilibrium in the market for unskilled workers occurs at a higher wage. Education & training programs benefit the workers who receive the training (because they become more productive) and those workers who do not receive the training (because the supply of unskilled workers decreases). Wages for all of these workers increase. (Remember our goal is to increase the income of these workers.)

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