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Raising the Minimum Wage (Vol. 12)

Updated: Feb 7, 2023

analyticsbox | Aug 11, 2021

Federal Minimum Wage Note

Good Intentions Don't Always Result in Desired Outcomes

There is a lot of discussion about raising the minimum wage to $15.00. For most supporters, the intentions are sincere and well meaning (for some big business support, perhaps not so well intentioned). Regardless of intentions, will the outcome be what’s intended?

Let’s look at a supply/demand curve for labor (if you are not familiar with these, go here for a quick explanation of supply/demand curves). For this particular set of labor skills we show an equilibrium in a free market and what happens if there is an imposed minimum wage.

he equilibrium in this example is at a $10.00 wage. At this wage 40,000 people are willing to work and 40,000 people are demanded by employers. So what is the impact when we raise the minimum wage to $15.00? At this wage rate, the demand drops to 10,000 workers. Those are represented by A and they are very happy, that group kept a job at a higher rate. Those in the group marked as B, are not happy, they lost their job. Those 30,000 people are out of work as there was no demand for them at $15.00/hour when there was demand at $10.00/hour. Those in the group marked as C would be new entrants into the labor market that are willing to work at $15.00/hour, except there is no demand for them and they have no job..

Here’s the point - there is a true equilibrium of supply and demand for labor in a free market, just as there is for any good. When you arbitrarily set a minimum wage above that, some might benefit, while others will suffer -- their minimum wage, for those who lost their job, is now zero - they have no job. This is not just economics theory, it has been empirically proven many times with real world examples. Even the New York Times editorialized in 1987 that the minimum wage should be zero. They had it right at that time. Let the market for labor allow employers and employees to bargain in good faith as to what one will pay and one will accept for the job at hand.

There are many other negative implications, especially for those lower, entry level workers trying to get experience. For further details about this, see this article.

The Bottom Line

Government interference in market forces seldom obtains the desired results, and in many cases the outcome is the opposite of what was intended, no matter how good the intentions are. The labor market is no exception. If there must be a minimum wage, we need to make it low enough so entry level workers can still find a job!

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