The Minimum Wage

The minimum wage is a law set by the both the federal government and the states to create a minimum rate at which workers can work. According to researcher at the Cato Institute Mark Wilson, this law was created during the Great Depression as part of Franklin Roosevelt"s economic policies (Wilson). It has, however, grown since it was first instituted. Today, members of Congress are trying to pass a minimum wage law that would raise the minimum cost of labor to $10.10 from the current $7.25. This should not occur as many economic laws and theories suggest that it would impose a net negative effect on the American economy. The first economic laws that could be cited against the proposal are the Law of Supply and the Law of Demand. According to "Principles of Microeconomics" by Libby Rittenberg, the Law of Supply states that as the price of a good or service increases, the supply will also increase. This is because producers see that there is a profit that could be made, and the increase in price would make their time and effort worthwhile. This applies to labor as workers are producers of labor. When labor is worth more, more people will want to work. The Law of Demand works opposite the Law of Supply in that the Demand decreases as price increases. This is because consumers are less likely to consume goods that are more expensive. This also applies to labor as businesses are consumers of labor. As the price of labor increases, businesses are less likely to demand it (Rittenberg, 121-151). Rittenberg continues to state that these two laws work together to form an equilibrium point. The equilibrium point is the point where supply meets demand, and this is dependent upon price. The price at which supply and demand equal is called the equilibrium price. Labor has an equilibrium price too. However, labor"s equilibrium price is dependent upon what is being performed. A fast food server is likely to have a low equilibrium price, but an engineer is likely to have a high one (Rittenberg, 152-167). Now, the minimum wage is what is referred to as a price floor (Rittenberg, 198). A price floor is the minimum price that can be placed on any good or service. If the price floor is set above the equilibrium price, the supply of a good or service will increase because the price being paid for a good increases. However, the demand for the good or service will decrease. The minimum wage would increase the supply for the good since more people would want to go to work, but it will also decrease demand. As a result, more people will want work, but fewer workers will be wanted. Thus, an employment shortage will occur. According to Hanson, this employment shortage could range from 500,000 to 1,500,000 American jobs (Hanson, 325). With an employment shortage, people will be clamoring for jobs, and employers will have a larger pool of people from which to choose to hire. This means that they can be more selective in who they hire. In other words, the minimum wage jobs of today will be taken by the more experienced and more educated individuals of society. The unskilled, uneducated, and the young will be hard-pressed to acquire the work experience they need to move up in the job market. The laws of supply and demand are a clear and common indicator of how price floors can harm the marketplace. It shows how the government trying to help can hurt. Still, there are more examples of theories that can prove that the minimum wage laws are not the best way to continue and resolve current economic issues. In fact, the Phillips Curve proves this. According to Kevin Hoover, the Short-Run Phillips Curve shows the correlation between inflation and unemployment over a short period of time. The Short-Run Phillips Curve is a smooth- "L" shaped curve that occurs when unemployment, x-axis, is graphed with inflation, y-axis. The "L" shape associated with the Short-Run Phillips Curve displays the negative correlation of these two variables: it shows that as the unemployment rate rises, the inflation rate falls (Hoover). The interesting feature about the Short-Run Phillips Curve, the one that applies in this situation, is that, according to Jordi Gali in "The Return of the Wage Phillips Curve," wages can be substituted for inflation in the Short-Run Phillips Curve. This would indicate that as the unemployment rate rises, wages fall and vice-versa (Gali, 3). So, how would the minimum wage effect the Short-Run Phillips Curve as it relates to wages? By increasing the minimum wage, the L-shaped curve in the graph would shift to the right in the graph. By doing this, the same wages associated with a certain unemployment rate will correspond to a higher unemployment rate post shift. Therefore, it can be assumed that if wages are at the proposed $10.10, the unemployment rate must be higher than it is for the short term. The "short term" is not defined, so it can range from months to several years depending upon a variety of different variables. Of course it is referred to as "Short-Run" because it does not answer the questions of wages/inflation versus unemployment in the long-run. Therefore, economists utilize the Long-Run Phillips Curve for cases in which a long run analysis is more helpful. The Long-Run Phillips Curve is not a curve; it is a line. It is a vertical line that rises from the normal unemployment rate. According to Kevin D. Hoover, if the Short-Run Phillips Curve shifts to the right, the Long-Run Phillips Curve will also shift to the right by the same proportion (Hoover). Therefore, even in the long run, the unemployment rate will be larger in this the United States if the minimum wage is increased. The Phillips Curve works to describe immediate and long term effects on wages. However, what factors set wages in the first place? The simple answer to that question is productivity. Productivity is the amount a producer can produce in a given time. This is a short definition, but it is broad enough to cover a wide range of circumstances. For example, accountants produce documentation of financial transactions and tax records. They do this in specialized ways using a specific methodology that they had to learn at college. They produce the documents companies must have in order to continue to operate within the parameters of the law. Therefore, accountants are productive and worth much money. This is why they get paid better than a fast food worker. Any particular fast food worker could produce low-priced food in a short period of time. The value of the food they produce in an hour is just slightly more than the current minimum wage. For companies to remain profitable, they have to pay their employees less than the value of the goods that they produce. This is why the wages of fast food workers seem so low. If the minimum wage is raised, what would happen to productivity? The answer is nothing. This is because wages do not determine productivity like many on the other side of the issue will sometimes argue. It is, in fact, the other way around. Productivity determines the wages (Hovenga). If the price floor is raised, then employees will be producing less for the company than they are getting paid to produce. How can a company continue to make a profit off of their employees if this is the case? According to the article, "The Detrimental Side-Effects of Minimum Wage Laws," employers have to branch out (Hovenga). In other words, they must look into hiring workers who can produce more than a $10.10 revenue in any given hour. According to The Journal of Collective Negotiations, this is not the young and inexperienced people hired by fast food restaurants or Mom-and-Pop stores (Moore). Again, the young and inexperienced will miss out on more job opportunities because of the federal minimum wage (Wilson). They will be replaced by machines wherever machines can be used, and they will be replaced by the people will plenty of on-the-job-training and even a college education (Hovenga). Furthermore, raising the minimum wage in this fashion is not fair to those who currently make more than the minimum. For example, those who have worked hard to make $10.15 today will still make that same amount after the minimum wage increases. They just made it over the minimum wage threshold. Therefore, they go from making almost three dollars more than the minimum wage per hour to making no more than a nickel more than the minimum wage. Also, those who are making $21.75 are making three times the minimum wage today; however, if it is raised to the specified amount, they will only be making just over double the minimum wage. Again, this is not fair. From the supply and demand argument to the productivity argument against the minimum wage, the youth miss out. The other side of the issue likes to argue that the current minimum wage is not sufficient, but the current minimum wage also includes the on-the-job-training and experience that the young are getting that they will not be getting upon passage of the minimum wage law if they cannot get a job. The minimum wage is not fair to those who have worked hard to get where they are, nor is it fair to those who are in the process of making it in the job market. According to Business & Society Review, the minimum wage laws harm the young and inexperienced workers disproportionate to those who are already experienced and situated in the economy. It is well-known that people need plenty of work experience in order to obtain higher paying jobs in this country. By raising the wages, the jobs will go to those who already have the experience and education. This will leave the nation"s current youth, especially minority members, at a disadvantage for many years to come (Hovenga).