How Minimum Wage Causes Unemployment
First, the graph:
A minimum wage is considered a price floor. In other words, it is a level below which the price of something is not allowed to fall.
Conversely, a price ceiling is a level above which the price of something is not allowed to rise. Think of rent control as a price ceiling.
Take a look at this graph of the labor market. The price of labor (shown on the y-axis) is of course, the wage rate. The point where the two black lines cross is equilibrium. At this point, the quantity of labor supplied by individuals is equal to the quantity of labor demanded by firms. Let's say it's 6 mil jobs at a rate of $15 per hour.
Think of the supply curve from your own personal perspective. It slopes upward because at higher wage rates you'll choose to work more, right? This is not always true due to the opposing influences of the income and substitution effects and something called indifference curves. However, we won't get into all that right now.
The demand curve can be thought of from the point of view of a firm. It slopes downward because the firm hires more workers at lower wage rates.
So it seems like a happy situation - no one is unemployed and the company has enough workers to meet product demand.
Now let's assume that legislation (a minimum wage law) is passed that requires firms to pay workers $20/hour.
At this wage rate, the demand curve tells us that the company only demands about 4 mil workers. However, the supply curve shows that 6 mil people are interested in working (because they will get $20/hour instead of $15/hour). So we have demand for labor equal to 4 mil and supply of labor equal to 6 mil. What do you think happens to the 2 mil extra people who can't get jobs at the company? They are unemployed.
But if minimum wage causes unemployment then why do minimum wage laws exist? The answer has to do with many things but politics probably plays the biggest role. Politicians would never get elected if they said, "Let's get rid of minimum wage!" Another part of the answer is that a complete lack of unemployment is not desirable.
Having said all of that, is raising the minimum wage still an advisable thing to do?
Yep great case again for raising it Lou. See those 2 million unemployed you speak of are already unemployed. Raise minimum to where it is advantageous to get off your ass and work and many of these unemployed will do so.
ReplyDeleteNow I don't know what kind of job you have where you can decide to work more or less depending on you wage rate. That is a ludicrous statement. That isn't happening in the real America. Your hours are scheduled and you work them I don't care if you make a dime or a Benjamin very few people have control of there schedule and hours, and those that do make well north of minimum wage.
It's ECON 101, Rick. In other words, it will be an additional 2 million added to the 2 million already unemployed. It is no wonder you support Obama having no knowledge of how an economy is supposed to work.
DeleteRick, step and raise the pay of everyone of your employees. They are worth it and keep in mind you cannot raise the cost of your food as people will take offense and go elsewhere.
DeleteThe other option is to require people to work if they want the freebies like food stamps, housing assistance. A much more powerful reason for the people to get off their fanny and get a job.
Guess you really didn't read the econ statement above did you Rick.
DeleteNow let's assume that legislation (a minimum wage law) is passed that requires firms to pay workers $20/hour.
At this wage rate, the demand curve tells us that the company only demands about 4 mil workers. However, the supply curve shows that 6 mil people are interested in working (because they will get $20/hour instead of $15/hour). So we have demand for labor equal to 4 mil and supply of labor equal to 6 mil. What do you think happens to the 2 mil extra people who can't get jobs at the company? They are unemployed.
"See those 2 million unemployed you speak of are already unemployed. Raise minimum to where it is advantageous to get off your ass and work and many of these unemployed will do so."
DeleteOnly a liberal who has supported the repeated extensions of unemployment benefits, put historic numbers of people on food stamps, allowed thousands of otherwise healthy people to draw disability benefits and complains because 'do nothing' republicans block the importation of millions of competing workers could make a silly statement like that.
By the way, the only reason that their appears to be any ambiguity in the data showing how harmful the minimum wage is, is because of the way these wage hikes are adopted.
If you raised the minimum wage $5 and hour 'effective today', you would see the full effect of the cost rise. As it happens, minimum wage hike have always been announced in advance. This gives employers time to cut staff by attrition or by consolidating responsibilities to take the work load around open positions. This happens gradually and does not point a glaring light at the minimum wage, but as I said, if you announced it today, making it effective today, you would see a much different pattern in adjusting to the new costs.
Here is an actual case study of one industry which shows the opposite effect:
ReplyDeleteMinimum Wages and Employment: A Case Study of the Fast Food Industry in New Jersey and Pennsylvania
David Card, Alan B. Krueger
NBER Working Paper No. 4509
Issued in October 1993
NBER Program(s): LS
On April 1, 1992 New Jersey's minimum wage increased from $4.25 to $5.05 per hour. To evaluate the impact of the law we surveyed 410 fast food restaurants in New Jersey and Pennsylvania before and after the rise in the minimum. Comparisons of the changes in wages, employment, and prices at stores in New Jersey relative to stores in Pennsylvania (where the minimum wage remained fixed at $4.25 per hour) yield simple estimates of the effect of the higher minimum wage. Our empirical findings challenge the prediction that a rise in the minimum reduces employment. Relative to stores in Pennsylvania, fast food restaurants in New Jersey increased employment by 13 percent. We also compare employment growth at stores in New Jersey that were initially paying high wages (and were unaffected by the new law) to employment changes at lower-wage stores. Stores that were unaffected by the minimum wage had the same employment growth as stores in Pennsylvania, while stores that had to increase their wages increased their employment.
And here is another study:
ReplyDeleteAlaska
In recognition of its high cost of living, for decades Alaska set its minimum wage to be 50 cents above the federal rate.2 In 2002, the Alaska legislature passed a minimum wage increase. As a result, on January 1, 2003 the Alaskan minimum wage went to $7.15, two dollars above the federal rate—an immediate bump of $1.50 per hour. This increase seems to have had no impact on the state’s unemployment rate, which has remained constant since the summer of 2002.
Other evidence further refutes the notion that Alaska’s minimum wage is hurting the state’s economy. Despite a persistently high unemployment rate, Alaska has experienced some of the strongest job growth in the country over the last few years. Prior to the recession that started in March 2001, job growth in Alaska was similar to the nation as a whole, even with the minimum wage set above most of the rest of the states. But while the nation has lost 1.8% of its jobs since the start of the recession, employment in Alaska has grown by more than 6% (see Figure 1). The $1.50 increase in the minimum wage in January 2003 does not appear to have had an effect on job growth, which has continued to be strong relative to the other states.3 As a result of continued job growth, Alaskans have experienced a smaller increase in joblessness than 33 of the 50 states.
Despite currently having the strongest job growth in the country, Alaska’s unemployment rate remains high because the state’s labor force has grown even faster than its jobs. Between 2000 and 2003, the Alaska labor force has grown faster than the national labor force, a combination of population growth along with growth in the share of the population seeking work. Additional factors affecting the state’s unemployment include geographic remoteness (the unemployment rate in Northern Alaska was 14.3% in 2003) and the seasonal nature of employment in Alaska (there are 14% to 18% more jobs in August than there are in January).4 It is the combination of these factors that cause Alaska’s persistently high unemployment rate, not lower employment levels that some would attribute to the minimum wage.
What is the antithapy towards paying folks a fair's day wage for a fair's day work? Is it forced valuation by the government? Curious ...
ReplyDeleteWhy hasn't the minimum wage risen with the economy? To many entry level people? Perhaps we should address the root cause of low entry level wages and look at escorting people to the border.
DeleteIn 2000, the McD's and Costco advertised help wanted 10 bucks an hour. Today they pay minimum wage. You cannot get a job at either place as they have a full staff. At McD's, if you do not speak Spanish, no job. half the kids in the area are unemployed yet the illegals work, no problem. I spoke with the McD's manager and asked him why he didn't hire the local teens. He was very honest about it, they cannot work full time and the people he hire can.
Having said all that wouldn't addressing the root cause of the low wage work better than artificially having the government adjust it. The problems still remain, nothing fixed.
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DeleteThe problem here pfunky is that we continually ask the wrong questions. The question is not why we refuse to pay a living wage. Labor is no more than a cost of production or material. A business does NOT open its doors with the primary goal of hiring people... the goal is to sell a product for a profit so it is wrong headed to think of labor as anything other than the cost of production. And the decision to hire is based on the goal of the business... to that I will add, the goal of the worker, as proven time and time again by unions, is not in the interest of the business but indeed counter to it.
DeleteThe real question is why is the cost of living so high? Why does living accommodation cost as much as it does? Why are our children not prepared when leaving high school to attend college and benefit from any degree more challenging than liberal arts. Why does higher education cost as much as it does? Why is the price of transportation so high? Why is the cost of medicine and medical care so high? and the ultimate question to all of the above.... Why is it that every single time that the government injects itself in the supply/demand equations is their a price distortion(generally higher) that must be absorbed by either a business or consumers?
I asked this question once before on her and got nothing but deflection. If business in general is a monopsonic power and can therefore set wages well below the market, why, in this era of easy money and venture capital, are these distortions not picked up by entrepreneurs who want to pay a fair wage. By exploiting this obvious scoundrel of an employer, the new business could easily take away all of the formers trained employees and create a very happy and motivated work force. The question you have to ask is... Is their really that much ill will among employers? Are the wages reflective of the employees real contribution to the product?
You ask why I am heartless (paraphrased but that is the intent of the question, No?) and I repeatedly say that most of these problems are created by the overriding intervention of the government into the lives of people.. people who try to run businesses and people who try to make a living wage in a grossly distorted economy.
This same kind of disconnect in discussion occurs in the cost of healthcare... which came first government intervention that forced companies to offer health insurance, a product that had little distribution at the time, to attract qualified employees because the government had frozen wages, or the desire of an employer to offer more benefits? Which came first a functioning set of charity hospitals of the governments EMTALA and drug importation laws that put those hospitals out of business?
The minimum wage raises the pay of many workers at the cost of some jobs. A lot of advocates for minimum wage increases consider this a good trade-off. They argue that the gains for the workers who benefit far outweigh the costs to those who lose out. For example, raising the minimum wage by 40 percent – from $7.25 an hour to $10.10 an hour – would cost roughly 8 percent of heavily affected worker groups their jobs (although losses would be larger among the most disadvantaged workers).[39] At first glance this may seem like a good deal.
ReplyDeleteHowever, this analysis ignores the way American tax and welfare programs claw back wage gains made by low-income workers. Congress has created many overlapping means-tested benefit programs: the supplemental nutrition assistance program (SNAP, formerly called food stamps), temporary assistance for needy families (TANF), the Earned Income Tax Credit (EITC), child-care subsidies, housing vouchers, and Women, Infants, and Children (WIC) benefits. The government also provides extensive in-kind health care benefits: Medicaid, SCHIP, and the soon to be operating health care exchange subsidies.
These benefits phase out at different rates as income rises. Earning an additional dollar of income reduces SNAP benefits by 24 cents. Workers in the EITC phase-out range lose 21 cents for each additional dollar they earn. Housing vouchers phase out at a 30 percent rate. Low-income workers must also pay payroll (15 percent) and income taxes (10-15 percent) on each additional dollar of income. Medicaid operates with a cliff: when workers’ incomes exceed a certain threshold, they lose all benefits.
Congress did not coordinate these benefit phase-outs across programs. Consequently low-income workers can face very high effective tax rates as they lose benefits from multiple programs. Consider workers both losing SNAP benefits and landing in the EITC phase out range. For each additional dollar they earn they pay 15 cents in additional payroll taxes, 15 cents in income taxes, an average of 5 cents in state income taxes, as well as losing 21 cents of their EITC benefit and forgoing 24 cents of SNAP benefits – an effective marginal tax rate of 80 percent. Each extra dollar earned increases their net income by only 20 cents. Not even millionaires pay such high tax rates.
Consider a Patty Jones, a hypothetical single mother in Des Moines, Iowa, who gets an offer for a job at minimum wage.[43] If she goes from not working to working full time, her monthly income rises from $1,146 to $1,838. However, if she gets a raise to $10.10 an hour, her monthly income falls to $1,574. She loses over $260.While her market income rises by $494, she loses $71 in EITC refunds, pays $37 more in payroll taxes and $45 more in state income taxes. She also loses $88 in food stamp benefits and $528 in child-care subsidies. Patty would be better off without the raise.
ReplyDeleteThis system makes it very difficult to lift families out of poverty by raising the minimum wage. Higher minimum wages make it more difficult for disadvantaged adults to find jobs. This hurts their finances. However, for those living below the poverty line who keep their job, the raise provides little net benefit. Much or all of what they gain in higher pay gets clawed back as reduced benefits.
College students and teenagers with jobs do benefit from a higher minimum wage; they have few government benefits to lose. But Congress does not raise the minimum wage to help teenagers buy jeans or iPhones. It does so to help families struggling below the poverty line. Current law makes it almost impossible to achieve that goal.
If Congress wants to reduce poverty it should focus on restructuring the welfare state to remove the current disincentives to work. For too many low-income families additional work does not pay. Few Americans at any income level would work longer hours when faced with a tax rate exceeding 50 percent.
ReplyDeletehttp://www.heritage.org/research/testimony/2013/06/what-is-minimum-wage-its-history-and-effects-on-the-economy
First @ gotta, I understand econ just perfectly. Our difference is that I understand the economy as it really is not in the fairy tale environment of the bubble. I work in the real econ everyday with a real struggling diverse group of regular people. You seemly sit in an ivory tower well above us common stooges.
ReplyDeleteYes raise the minimum wage. @ Louman, even in your previous thread about this subject you stated that it was financially more favorable to live on the public dole then to go get a job. There are easily 2 million people who do just that today, live on the public dole because it pays better, and has some really great benefits. Even above @ William Martin you say remove the disincentives to work. Make work pay a living wage and yes you will remove at least 2 million from the welfare rolls. Where they gonna work you say? Right now in America there are 13 million unfilled jobs. 13 million unfilled because they don't pay enough or there are not workers with the skills needed to fill them. So let's raise the minimum and train people to fill the other jobs. It's called investment in America and the president has been preaching it for 6 years. But the party of no is not interested in investing in America, the party of no talks about providing opportunity but does absolutely nothing to advance that talk. The only opportunity the repubs like are the ones that benefit them or the ones they can create for free, The jobs are out there we just can't (or won't) do them. We do not have to completely scrap and start over on our education system as the repubs would have you believe we need accountability. Many of these unfilled jobs can be trained right in the community colleges and two year tech institutes that now exist, at a very reasonable cost, but god forbid that you borrow a cent to get your needed training. See your problem is you don't know the streets like I do. I am out there among them everyday, regular people who want to do better but have a plethora of hurdles that hold them back. You guys just don't really get the average American.
Well then, let's just raise the minimum wage to $1000.00/hr and all of our problems are solved..............
DeleteYou dodge the issue completely. If there were fewer entry level workers they would make more as the law of supply and demand would dictate higher ages.
DeletePerhaps it's time for the excess labor to go home. Set standards for receiving welfare. Work or no benefits. Clinton did just that and it reduced the welfare rolls. Those requirements are all but gone and the applicants soar.
"Many of these unfilled jobs can be trained right in the community colleges and two year tech institutes that now exist, at a very reasonable cost, but god forbid that you borrow a cent to get your needed training." rick
Delete"The most recent comprehensive report we found on the matter found 47 job training programs under nine agencies."
http://www.politifact.com/truth-o-meter/statements/2012/may/16/mitt-romney/mitt-romney-said-there-are-49-different-federal-jo/
rick, we presently borrow 40 cents on every dollar we spend.
Delete1773-2009
This comment has been removed by the author.
DeleteYeah right WM. I can show you 47 just in my state. Your "facts are a political statement from Mitt Romney? Are you kidding me? Get your facts from real news and websites.
DeleteMarch 15, 2013, 04:24 pm
DeleteHouse passes bill streamlining federal job training programs
By Pete Kasperowicz
The House narrowly approved legislation Friday that would streamline and consolidate dozens of federal job-training programs, which most Democrats opposed even as Republicans said the bill meets President Obama's goal of simplifying these programs.
Members approved the Supporting Knowledge and Investing in Lifelong Skills (SKILLS) Act in a 215-202 vote. Several Democrats spoke against the bill, and in the final vote, only two Democrats supported it. Fourteen Republicans voted against it, which is what made the vote so close.
The mostly party-line vote was expected after Democrats walked out of a House markup of the legislation last week amid claims that Republicans were not allowing Democrats to provide their input into the legislation.
The bill turns 35 separate federal job-training programs under the Workforce Investment Act (WIA) into a single "Workforce Investment Fund." This fund would direct money to states for job training programs and would require some of the money to help people facing specific obstacles find work.
Republicans said this state-focused change is needed to ensure that the millions of Americans still looking for work are able to gain new skills through an improved federal training system.
"How can we be a nation that spends over $18 billion a year on job training programs — over 47 job training programs — and yet have almost 3.6 million jobs going unfilled?" Rep. Susan Brooks (R-Ind.) asked in Thursday debate on the bill. "[W]e have jobs that are unfilled because we have a system that doesn't work."
"A bloated bureaucracy is standing between workers and the support they need," House Education and the Workforce Committee Chairman John Kline (R-Minn.) said Friday. "We've tried the Washington-knows-best approach, and it isn't working. It's time to move in a new direction."
http://thehill.com/blogs/floor-action/house/288431-house-passes-bill-streamlining-federal-jobs-programs
Title I: Amendments to th
Deletee Workforce Investment Act.
Title I would revise and
reauthorize the WIA by consolidating separate
grants for adults,
dislocated workers,
veterans and youth (including Job Corps gr
ants) and some employment service functions
4
currently authorized under
the Wagner-Peyser Act into a
single funding stream. Those
programs, which receive
d approximately
$6.3 billion in fiscal
year 2013, would be
authorized for fiscal years 2014 through
2020. Assuming the ap
propriation of the
authorized amounts, CBO estimates that
implementing title I would cost about
$22.3 billion over th
e 2014-2018 period.
Title II: Adult Education and Fa
mily Literacy Education Act.
Title II would revise and
reauthorize the adult education programs in title
II of the Workforce Investment Act. The
bill would authorize the approp
riation of about $600 million
for state grants and national
activities for each of fiscal years 2014 thro
ugh 2021, similar to the amount the Congress
provided in 2013. (The bill wo
uld repeal authorizi
ng language for the National Institute for
Literacy, which has not received
an appropriation since fisc
al year 2010.) CBO estimates
that implementing title II would cost abou
t $2.3 billion over the
2014-2018 period,
assuming appropriation of the authorized amounts.
Title III: Amendments to the Wagner-Peyser Act.
Title III would reauthorize labor
market information functions of the
Wagner-Peyser Act a
nd would authorize
appropriations for those purpose
s at $63 million for each of fi
scal years 2014 through 2020.
(In 2013, an estimated $63 million was appr
opriated for similar purposes.) CBO estimates
that implementing title III would cost $282
million over the 2014-2018 period, assuming
appropriation of the authorized amounts.
Title V: Amendments to the Rehabilitation Act.
Title V would revise and reauthorize
existing discretionary grant pr
ograms under the RA. The authorizations for those programs
have expired but are extended through 2013
because the Congress a
ppropriated funds for
them for 2013. The bill would reaut
horize the programs through 2020.
Department of Education Programs
. The Department of Edu
cation runs a variety of
categorical grant and demonstration programs
under the RA—primarily aimed at training,
employment support for the disabled, independ
ent living, research, and advocacy projects.
The bill would authorize the a
ppropriation of $317 million for
those programs for each of
fiscal years 2014 through 2020,
about $30 million less than pr
ovided for those programs in
fiscal year 2013. (The bill al
so would repeal the underlying
authority for state grants for
supported employment,
and rehabilitation services for mi
grant and seasonal farmworkers,
for which the Congress provided a total of $30
million in fiscal year 2013.) CBO estimates
that implementing those prov
isions would cost nearly
$1.3 billion over the 2014-2018
period, assuming appropriation of the authorized amounts.
National Counc
il on Disability
. The Council is responsible fo
r reviewing federal laws and
policies affecting individuals with disabilities.
The bill would authorize the appropriation
of $3 million for the Council for each of fi
scal years 2014 through 2020, equal to the
5
estimated amount appropriated for fiscal year
2013. CBO estimates that implementing this
provision would cost $15 millio
n over the 2014-2018 period.
Architectural and Transportatio
n Barriers Compliance Board
. The Board develops
guidelines to ensure access to
buildings, transportation vehi
cles, and telecommunications
equipment for individuals with
disabilities. The bill would au
thorize the appropriation of
$7 million for the Board for each of
fiscal years 2014 through
2020, equal to the estimated
amount appropriated for fiscal year 2013. CBO
estimates that implementing this provision
would cost $35 million ove
r the 2014-2018 period.
Boy, that's a lotta words. This one is pretty simple when we finally finish erasing every gain that workers made since the great depression AND we raise the standard of every third world shit hole where ruthless wang sucking multinationals abuse their workers AND our boomer demo starts to retire in waves, the fat crap bags in large corporations will be stuck eating the cheese as the market forces them to pay for labor that will be in short supply.
ReplyDeleteIt's kind of laughable that some claim we should just close the borders. Just wait until the pool of labor eventually shrinks. You will hear the US Chamber of Commerce SCREAMING that we need to open our borders wide to protect profit. It's a game. Always was, always will be.
Isn't a smaller labor pool desirable to raise wages via supply and demand?
DeleteIt is desirable to raise wages and eventually, after a long and unnecessary period of stagnation and misery for American workers, this will happen. Capitalism, to me, is a simple system that provides simple results. If your major goal is to reduce cost and maximize profit, Capitalism is what you need. If, on the other hand, you want less pollution, a stable standard of living for workers and a general stability in society, pure capitalism will not get you there.
DeleteThe pure capitalist will do nothing until "the market" forces him to do so. His one and only goal is profit. There is nothing evil about that to me. But in terms of the goods, the market will receive only what it asks for, nothing more and if possible, much less.
At this point and time, we have the mirror image of the 1950's. Comparatively, there are fewer regulations and for multinationals, there are almost no regulations and they can exploit third world countries quite extensively, although eventually that will end. In this country, much of what workers had then has been taken away with the added benefit that most of our society has now actually come to view those benefits with contempt. Profit, of course, has climbed enormously for large corporations, as has top end CEO pay. IMO Lou, we've simply reconfigured the playing board to shift money away from workers back up to the top. There is no shortage of money available for investment in business, but there is a death claw that is being exerted by owners of capital simply because they can. This is known as rent seeking behavior.
Capitalism rightly rewards the risk takers, but it doesn't force them to keep taking risk once they have succeeded and we have the situation at present where we have a large pool of labor that would rather be employed than try to live off of shitty hand outs. But instead of bringing jobs, those with capital are just using their leverage to keep getting subsidized to protect their capital. Attempting to raise the minimum wage is basically an attempt to try and claw back what has become an embarassing and destabilizing trend of disparity. While I support it, I readily admit it's kind of pissing in the wind.