Minimizing Economic Opportunity by Raising the Minimum Wage

Simple Economics
A minimum wage operates by removing the lowest rung on the economic ladder – it doesn’t just take away current jobs, but also future job opportunities. So how many rungs will Congress knock out this time? Senator Ted Kennedy proposes raising the minimum wage by $2.10 an hour. The Republican alternative from Senator Rick Santorum calls for an increase of $1.10. So the two options on the table are a mandatory price increase of 41 percent or 21 percent. The consequences for labor demand are predictable.

The goal of price controls like the minimum wage is essentially to repeal the law of supply and demand, but senators might as well try to repeal the law of gravity. Worse than folly, disrupting the equilibrium of labor markets causes economic damage. Although the minimum wage will not work according to economic theory—and it has not worked in reality—what makes it especially tragic is that it hits poor Americans hardest.

A survey published in the Winter 2005 Journal of Economic Perspectives, an academic publication, reports that 71 percent of economists at America’s top universities agree with the statement “a minimum wage increases unemployment among the young and unskilled.” About one-third of the economists agree outright, and another third agree with reservations. Think about that: the consensus among top economists is that the very existence of a minimum wage harms those who, according to its supporters, need it most.

Perfectly Competitive Labor Market

Introductory economics textbooks usually first introduce the minimum wage as an application of demand and supply analysis. This initial discussion is usually based on the following assumptions:
-the labor market is perfectly competitive,
-the minimum wage covers all workers, and
-worker productivity is unaffected by the wage rate.

Under these assumptions, the effect of the minimum wage is quite straightforward: the introduction of a minimum wage results in unemployment in those labor markets in which the equilibrium wage rate is below the minimum wage. This is illustrated in the diagram below:

While minimum wage increases generally receive substantial public support, economists have generally relied on the above analysis to argue that such legislation will result in an increase in the unemployment rate in low-wage labor markets.

http://www.swcollege.com/bef/policy_debates/increase_minimum.html

Costs of Increase in Minimum Wage

Costs
Opponents of the minimum wage claim it has these effects:

• Reduces demand for 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.
• Hurts the least employable by making them unemployable, in effect pricing them out of the market.
• Reduces profit margins of business owners employing minimum wage workers, thus encouraging a move to businesses that do not employ low skill workers.
• Is a limit on the freedom of both employers and employees. Minimum wage laws make it illegal for employers to pay workers less than the minimum wage.
• Decreases opportunities for low-skilled workers to gain the training and responsibility they need to move up the wage ladder.
• It is important to recognize that the jobs lost are mainly entry-level jobs. By destroying entry-level jobs, a higher minimum wage harms the lifetime earnings prospects of low-skilled workers.
• increases the number of high-school students who drop out.

General Ideas of Minimum Wage

-A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers.
-The costs and benefits of minimum wage laws are not fully understood, and are debated.
-Many supporters assert that the minimum wage is a matter of social justice that helps reduce exploitation and ensures workers can afford what they consider to be basic necessities. -Supporters deny that the minimum wage adversely impacts employment, or argue that such an effect is modest and outweighed by the social benefit derived from higher wages.
-Detractors contend that a minimum wage increases unemployment among low-wage workers, harming rather than helping the poorest workers. Some also argue that it slows economic growth.

What do you think should be asked?

Statement: NYS should not raise its minimum wage because it will increase unemployment among young and unskilled workers.

1. What is the minimum wage?
2. Whether I agree or disagree with the statement?
3. How does an increase in the minimum wage affect unemployment?

1. The current minimum wage $7.15
2. I agree with the statement because when there is an increase in wage, the employer has a less desire to increase the number of employees. In some cases the employer actually ends up firing some of his/her employers because he/she can't afford to keep them.
3. An increase in minimum wage negatively affects unemployment. The young and unskilled workers are fired from their jobs which don't require much education.