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.
Rarely does a day go by that I don't purchase something like a pop and reminisce about the "good ol' days" when said item was cheaper. I think the prices going up is the most prevalent effect of minimum wage increases even if the unemployment increase (or lack thereof) also exists. Then again, I'm also without a job right now, and probably will be for a few more months if not longer, so my fixed amount of money is able to buy less which is probably why i'm feeling the effects so greatly.
ReplyDeletewell said...i believe prices rise faster than wages...those earning at or below the minimum wage are hurt the most...Oliver Blanchard, MIT, says, P = (1 + U)W is the price setting relation where U is the markup...so prices will always be marked up over wages...just about all research i've read shows that the real buying power of minimum wage earners today is less than the buying power in the 1970's...we know the wage is going up to $8.20 soon...
ReplyDeleteThe question would seem to be, which effect is more deleterious - price inflation or a slightly reduced rate of unemployment? My assumption is that those in favor of minimum wage increases would argue that the value of reducing the number of unemployed is greater than the harm of a proportional amount of price inflation. I, for one,would be interested to know what the "upstream" effect is: as price increases flow backward from the employer of a given minimum wage worker to the employer's supplier, to the supplier's supplier, etc. are there cumulative opportunity costs in the form of foregone hiring of more costly but more skilled and productive workers? I am always concerned about perverse incentives and, being a bit of a neo-Austrian, am deeply suspicious of even the most benign sort of intervention.
ReplyDelete