Mininum wages?

Question

State the purpose of this legal price, assess its impact on the market for labor, and evaluate the extent to which it achieves its purpose.

Answer 1

A minimum wage is the lowest hourly, daily, or monthly wage that employers may legally pay to employees or workers. First enacted in Australia and New Zealand in the late nineteenth century, minimum wage laws are now enforced in more than 90% of all countries.

Both supporters and opponents of the minimum wage assert that the issue is a matter of ethics and social justice involving worker exploitation and earning ability. Supporters claim that increases in the minimum wage increase workers' earning power and protect workers against employer exploitation. Opponents claim that increases in the minimum wage increase unemployment, and that the reduction in earning power due to the unemployment outweighs the increase in earning power among minimum wage workers who remain employed, while businesses effectively exploit the unemployed minimum wage workers by transferring their former wages to the minimum wage workers who remain employed.

Economic theory analyzes the effects of minimum wages within the context of labor markets (c.f. labor economics). In a labor market, workers supply their labor, which is sold for wages, and employers demand labor.

The neoclassical economic argument views the labor market as perfectly competitive. In perfectly competitive markets, the market price settles to the marginal value of the product. Therefore, under the perfect competition assumption, in the absence of a minimum wage, workers are paid their marginal value. As is the case with all (binding) price floors above the equilibrium, minimum wage laws are predicted to result in more people being willing to offer their labor for hire, but fewer employers wishing to hire labor. The result is a surplus of labor, i.e. unemployment.

Gary Fields, Professor of Labor Economics and Economics at Cornell University, argues that the standard "textbook model" for the minimum wage is "ambiguous", and that the standard theoretical arguments incorrectly measure only a one-sector market. Fields says a two-sector market, where "the self-employed, service workers, and farm workers are typically excluded from minimum-wage coverage… [and with] one sector with minimum-wage coverage and the other without it [and possible mobility between the two]," is the basis for better analysis. Through this model, Fields shows the typical theoretical argument to be ambiguous and says "the predictions derived from the textbook model definitely do not carry over to the two-sector case. Therefore, since a non-covered sector exists nearly everywhere, the predictions of the textbook model simply cannot be relied on.".

An alternate view of the labor market has low-wage labor markets characterized as monopsonistic competition wherein buyers (employers) have significantly more market power than do sellers (workers). This monopsony could be a result of intentional collusion between employers, or naturalistic factors such as segmented markets, information costs, imperfect mobility and the 'personal' element of labor markets. In such a case the diagram above would not yield the quantity of labor clearing and the wage rate. This is because while the upward sloping aggregate labor supply would remain unchanged, instead of using the downward labor demand curve shown in the diagram above, monopsonistic employers would use a steeper downward sloping curve corresponding to marginal expenditures to yield the intersection with the supply curve resulting in a wage rate lower than would be the case under competition. Also, the amount of labor sold would also be lower than the competitive optimal allocation.

Such a case is a type of market failure and results in workers being paid less than their marginal value. Under the monopsonistic assumption, an appropriately set minimum wage could increase both wages and employment, with the optimal level being equal to the marginal productivity of labor. This view emphasizes the role of minimum wages as a market regulation policy akin to antitrust policies, as opposed to an illusory "free lunch" for low-wage workers. Laissez-faire economists such as Thomas Sowell point out that no collusion between employers to keep wages low has ever been demonstrated, asserting that in most labor markets, demand meets supply, and it is only minimum wage laws and other market interference which cause the imbalance.

Supporters of the minimum wage claim it has these effects:

Helps small businesses as well as big businesses.

Increases the standard of living for the poorest and most vulnerable class in society and raises average.

Motivates and encourages employee to work harder. (Contrast with welfare transfer payments.)

Does not have budget consequence on government. "Neither taxes nor public sector borrowing requirements rise." (Contrast with negative income taxes such as the EITC.)

Minimum wage is administratively simple; workers only need to report violations of wages less than minimum, minimizing a need for a large enforcement agency.

Stimulates consumption, by putting more money in the hands of low-income people who spend their entire paychecks.

Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees.

Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid.

Does not have a substantial effect on unemployment compared to most other economic factors, and so does not put any extra pressure on welfare systems.

Businesses' annual and average payrolls grow faster.

Employment grows more quickly when minimum wage is increased

Opponents of the minimum wage claim it has these effects:

Hurts small business more than large business.  

Lowers competitiveness.

Reduces quantity demanded of workers. This may manifest itself through a reduction in the number of hours worked by individuals, or through a reduction in the number of jobs.

Reduces profit margins of business owners employing minimum wage workers, thus encouraging a move to businesses that do not employ low-skill workers.

Businesses try to compensate for the decrease in profit by simply raising the prices of the goods being sold thus causing inflation and increasing the costs of goods and services produced.

Increases prices for customers of employers of minimum wage workers, which would pass through to the general price level, which disproportionately affects the prices that poor people pay for goods and services.

Does not improve the situation of those in poverty. "Will have only negative effects on the distribution of economic justice. Minimum-wage legislation, by its very nature, benefits some at the expense of the least experienced, least productive, and poorest workers."

Is a limit on the freedom of both employers and employees, and can result in the exclusion of certain groups from the labor force. For example, during the apartheid era in South Africa, white trade unions lobbied for the introduction of minimum wage laws so as to exclude black workers from the labor market. By preventing black workers from selling their labor for less than white workers, the black workers were prevented from competing for jobs held by whites.

Businesses spend less on training their employees.

Is less effective than the Earned Income Tax Credit at targeting the truly needy, and is more damaging to businesses.

Reduces economic growth by skewing factor-choice incentives away from the optimum choice.

Increase in unemployment.

Decreases human capital by encouraging people to enter the job market instead of pursuing further education.

Hurts the least employable by making them unemployable, in effect pricing them out of the market.

Causes outsourcing and loss of domestic manfucturing jobs to other countries.

As argued by former Council of Economic Advisors Chairman Gregory Mankiw, a minimum wage is equivalent to:

A wage subsidy for unskilled workers, paid for by

A tax on employers who hire unskilled workers.[25]

The first part of the policy provides some benefit to low wage workers while the second part creates more unemployment among low wage workers. This is why the minimum wage is often criticized as a self-contradictory policy. Others argue the small decrease in employment is offset by the increased benefit to workers.

[edit] Empirical studies



Comparison of the minimum wage to unemployment among low skill workers in the U.S. The points in red are for the years 1998 through 2000. Unemployment for all workers in those three years was the lowest since 1970. Opponents of the minimum claim that these rises in unemployment are related to minimum wage increase.[26][27]A classical economics analysis of supply and demand implies that by mandating a price floor above the equilibrium wage, minimum wage laws should cause unemployment. This is because a greater number of workers are willing to work at the higher wage while a smaller numbers of jobs will be available at the higher wage. Companies can be more selective in those whom they employ thus the least skilled and inexperienced will typically be excluded.

However, there are many other variables that can complicate the issue such as monopsony in the labour market, whereby the individual employer has some market power in determining wages paid. Thus it is at least theoretically possible that the minimum wage may boost employment. Though single employer market power is unlikely to exist in most labour markets in the sense of the traditional 'company town,' asymmetric information, imperfect mobility, and the 'personal' element of the labour transaction give some degree of wage-setting power to most firms.

Economists disagree as to the measurable impact of minimum wages in the 'real world'. This disagreement usually takes the form of competing empirical tests of the elasticities of demand and supply in