I have waited a long time for this post. I begin by stating the premise that raising the minimum wage will result in unemployment especially among blacks and teenagers. Econ 101 predicts that the minimum wage is a price floor that results in an excess supply of workers and employers will change the quantity demanded by decreasing the quantity of workers. Great theory but does it hold water in reality?
Effect April 1, 2007, Iowa raised the minimum wage from $5.15 to $6.20. I have graphed the unemployment rate in percent for Muscatine Country. As you can see the unemployment rate actually fell from January, 2007, to July, 2007. In other words, employers hired more workers just as TCU economist, Ravi Batra predicted. Batra simply states that if wages increase, prices will too. So everything stays in balance. (Click on graph to enlarge.)
One has to be careful not to generalize my conclusion to the whole state and commit the falacy of composition. However, the actual number of unemployed decreased in May to 922 from 962 while the number in the number employed increased from 29,057 to 29,084. Were these workers displaced by college students returning to old jobs?
In Econ 101 speak, the demand for labor is given by how much labor can make for the employer and is given by the formula: MRPlabor = $P times MPP, where MRPlabor is the demand for labor, $P is the price of the product, and MPP is the marginal Physical Product or how much labor makes. Say, businesses raise the price of its good because the minimum wage increases. According to this formula, the demand for labor will increase. According to my data obtained at www.economagic.com/ raising the minimum wage did not result in unemployment.