The Minimum Wage Debate

Clearly, the debate left things unsettled, because the protagonists are still arguing. [update: Betsey Stevenson contributes noise to the debate.]

The point that I would like to hear shouted from the rooftops is that the minimum wage in the United States is just barely effective. We teach in freshman economics that a price floor is only binding if it is above the equilibrium price. But looking at the number of workers covered by the minimum wage is small, and knowing that the vast majority of unemployed workers are not clamoring for minimum-wage jobs, I would say that you should draw your labor supply and demand diagram with the minimum wage just epsilon above the market equilibrium. It should be hard to see the effect of the minimum wage on employment in your diagram, and it should be hard to see the effect in the real world.

In that sense, Elizabeth Warren is right–if you really want to have an effective minimum wage, it needs to be a lot higher. That is what the debate should focus on, in my opinion. What would happen if we raised the minimum wage by $5 an hour or more? In that case, if somebody wants to try to argue that the effect on employment would be negligible, good luck to them.

3 thoughts on “The Minimum Wage Debate

  1. Sigh, what is “the equilibrium price” in this case, the average wage of workers who make less than $10/hour? Any minimum you set, there will always be transactions that don’t clear, because the market-clearing price is lower. What the lefties really seem to be worried about here is information asymmetry, that business- and supply-demand-ignorant low-wage workers are being taken advantage of by canny overseers. If that’s the case, I’ve always said that their solution should be to inform the workers, teach them how to bargain or figure out the prevailing wage. Uneducated farmers in rural india are using the internet to figure out the best prices for their crops (though eventually slowed by the inevitable idiot govt regulators), why can’t low-wage workers here do the same? Because it’s all so much easier for Obama and Warren to hand down a diktat from on high and go back to their cushy life, imagining that they’ve solved a problem.

  2. My guess (a charitable view, I suppose) is that most labor economists agree with you that the minimum wage law affects few workers. Therefore, their supporting the populist view that a higher minimum wage has no adverse effect is a sort of loss-leader. Democrat politicians are more likely to hear them out on other, more important issues.

    The alternative is that most labor economists fail to be objective, and fail to apply good economics and statistical analysis when it comes to this issue.

  3. Same question as the first poster: whose S-D curve are we drawing?

    My impression is that the minimum wage is at a significant level for early teenagers. Kids that used to be able to get a job sweeping the floors somewhere are now less able to do that. More’s the pity, in my opinion. I don’t think it’s right for every kid, in every family, but I think a early job, a real one, would be valuable for many people. It teaches life lessons that you just can’t learn while sitting in your tidy rows of desks and obeying the ringing bell.

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