In class, we learned how price floors can influence the demand for labor. A minimum wage acts as a price floor which causes the supply of labor to exceed its demand as companies hire fewer workers because they are more expensive, causing unemployment. However, we also discussed how many economic theories do not always represent real life.
In 1993, economists Alan Krueger and David Card tested out this theory. They observed over four hundred fast-food restaurants to see how employment growth correlated with an increased minimum wage in New Jersey and eastern Pennsylvania. They found little evidence connecting the two, summarizing their findings in the book, Myth and Measurement.
The British government commissioned Arindrajit Dube to the evidence around twenty-five years after the publication of Alan Krueger and David Card's work was published. Dube was a professor at UMass Amherst and was a leading expert on how minimum wage laws affect economics. While compiling research, he collected estimates from across the world, taking information from 36 US cities including estimates from the UK. He found that the average effect of a price floor on employment is quite close to zero. This suggests that raising wages does not produce much of a negative outcome. Other review papers came out that examined the correlation between minimum wage and employment from 1979 to 2016, also finding little change.
It has been found that the burden of increased minimum wages is often passed on to the consumer while other firms have monopsony power, allowing them to pay their workers less.
This is interesting because raising minimum wage has a huge effect on workers. This way raising minimum wage would benefit the workers and companies would still be able to hire the same amount of workers. But at some point does raising the minimum wage put too much of the strain on the consumers?
ReplyDeleteThis is probably due to the fact that demand for workers is constant. If you need 8 people to run a storefront, you need to hire 8 people, regardless of their wage. Even at a lower wage rate, the marginal benefit of adding another worker might outweigh the cost. Of course, as you said, the increased cost is passed onto consumers or absorbed by the company, hurting shareholders.
ReplyDeleteAlthough raising the minimum wage seems promising, it actually has some negative consequences to consider, some of them not measurable by economists. For example, companies can simply lower working hours to overall pay them the same or even less than before, in addition to raising the prices mentioned in the OP (since the profit margins for small stores are especially thin). The externalities caused by this legislation are also notable - the higher minimum wages allows workers to be more comfortable where they are, causing them to stay at their job and not search for better-paying ones; and even if they did later, their lack of experience at a younger age will work against them in the job market. In the end, it might be better to keep the minimum wage jobs at where they are right now in order to encourage workers to seek a more financially rewarding future.
ReplyDeleteWe see the positive effects of raising minimum wage in cities like Sunnyvale who currently have a minimum wage of $15.75 with a yearly increase of 75 cents. This is one of the highest minimum wages in the area and Sunnyvale is doing really well in terms of business. By raising the minimum wage more of their population is able to save and have extra spending money, stimulating their economy.
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