Minimum Wage: Plausible moral choice or bad economics?

There is doubtless a compelling moral reason to support workers earning more money to take care of their family responsibilities but just how practical is it? A crash course in “Microeconomics 101” shows   supply/demand models that seem to strongly suggest the alternative opinion that such a policy is not the panacea that it would appear to offer at first glance. For one thing, there is a certain number of jobs at the prevailing wage rate (job market in equilibrium), and this is taking into account the people who are looking for work and vacancies that have gone unfilled. Imposing a minimum wage rate (price floor) that is above the prevailing wage rate can result in employers laying off workers or not hiring as many workers at the higher rate. As a result, you have a greater Demand for jobs at the higher wage but the Supply has shrunken, adding to higher unemployment. The policy benefits those few workers who are paid the higher wage but at the expense of those who had to be laid off. One of the unintended consequences is that it disproportionately affects low-skilled and less productive workers because it will be harder for them to be competitive in the labor market at the higher range of earnings as employers can be more selective about whom they want to hire. An employer might raise the wage of workers fifteen percent or so but more than that, say fifty percent or greater, might just force the company to go out of business. The most disadvantaged, unproductive workers are the most vulnerable and increasingly likely to be priced out of the job market altogether. In order to survive, employers will have to reduce hours, cut benefits (pensions, health benefits), as well as pass along the increased costs to the consumer.

With the wage increase, unemployed people might find it advantageous to spend their time and effort trying to get one of those better paying jobs when they might have been willing to work for much less, even at the old prevailing rate. A better solution might be for an individual employer to pay workers a “living wage” which is in economic terms, an hourly wage rate for a 40-hour work to pay rent or housing for no more than roughly thirty-five percent of the amount earned. If the rent is $210 weekly, this amounts to $840 monthly. $840/0.35= $2,400/160 hrs. = $15/hr. In this example the living wage may very well exceed the minimum wage and it is offered simply as an illustration. Practically speaking, if a firm wanted to pay its employees more it could do so by becoming more efficient, lowering marginal costs while increasing the output from labor (being more productive). It could become more innovative than the competitors where it gains a monopoly position and could charge higher prices from increased Demand, thereby passing along some of the increased profits to valued employees who contribute to the successful outcome. So, the minimum wage might be a good short term remedy to offset higher cost of living expenses but it may not solve the long-term solution of pay inequity; at least not for those who will be the most adversely impacted (economically poor, low-skilled, non-college educated, or workers who do not have vocational/technical school training).

 

REFERENCES

 

Browning, Edgar K and Zupan, Mark A. Microeconomics: Theory and Applications.
New Jersey: John Wiley & Sons, 2006. Print.

Parkin, Michael. Microeconomics. New York: Pearson Addison-Wesley, 2005. Print.

 

Robert Randle

776 Commerce St. #B-11
Tacoma, WA 98402
May 27, 2014
robertrandle51@yahoo.com