With announcements coming from Hilary Clinton and multiple Republicans this last week that they will be seeking their respective party’s nomination for the Presidency of the United States the election cycle has officially begun. One of the issues that will be (or at least should be) at the forefront of the campaign trail is the recent push to raise the minimum wage. Unfortunately for all of us this debate will be flooded with propaganda and misinformation from both sides. So here at The Eclectic Eccentric I thought it would be the perfect time to address it in my inaugural edition of “It’s the Economy Stupid”.
So to start off with what is a minimum wage? Well it’s exactly what it sounds like. It’s the minimum hourly pay that employer is required to pay an employee. In economic terms it’s a price floor on the labor market that creates an artificial equilibrium point for the market to operate at.
Under normal circumstances a price floor has the effect of shifting the demand curve, decreasing the demand for a product while increasing the people to supply it. The tricky part about the minimum wage is that labor really means people and people do two things that other products in the great economic web do not: they consume and they govern.
Which means the economic arguments for and against raising the minimum wage are often not as cut and dry as they appear. First let’s talk about how it will affect the job market. As I stated above with a typical price floor demand decreases, supply increases, and a surplus is created. Since in case the surplus is labor that means more people for fewer jobs, in other words unemployment goes up. This is the basic economic principle that many opponents of a minimum wage hike point to. The problem with this is that this is in fact a basic principle. It exists in a vacuum. Cities, counties, and countries do not.
On the supply side of the jobs issue it assumes more elasticity (susceptibility to external factors) in the labor market than actually exists. Overall the labor market can be considered elastic yes but the lower you go on the wage scale the more inelastic it becomes with costs to pursue non-workforce related activities (stay-at home parenting, continuing education) too high to bear for low-income families (which is a whole other ball of wax). The argument that these low-income workers will just go on the dole is a non-starter data wise. The point is on the supply side the low-income labor force tends to be what the low-income labor force is irrespective of demand.
On the demand side of the issue there are however legitimate concerns. You might not think that a fast food worker or Starbucks’s barista can’t be replaced, but the truth is that they can be and while this particular wage hike might not be what does it eventually we might come to a point where that begins to mater. Remember that larger corporations have a cheaper marginal cost to automatize than local small businesses and younger generations do not have the aversions to ordering from an iPad that older ones do.
Other important things to note in this debate. While the minimum wage has increased over the years those increases have been outpaced by inflation reducing its effective purchasing power somewhere between 30-60% (it varies by study/formula). Also a recent study from UC Berkley states that nearly 3/4ths of welfare recipients work at least one job. Meaning they can’t live off the income from that job and as a result the American taxpayer is subsidizing their salary to the tune of 152 billion dollars a year.
This barely scratches the surface of the debate and people much smarter than I am are divided on the real impact of a minimum wage hike on local and national economies but I hope this piece can act a primer for you and help you realize that this is a complex issue and anyone on either side who simplifies it by painting a picture of lazy workers or corrupt businesses is an ideologue and an idiot.