The competitive model has been most often used for evaluating the minimum wage. This is the basic textbook model that has been taught in university economics courses for decades. The core components of the model are a negatively sloped labor demand curve and a wage rate that clears the market and is not controlled by individual agents. In competitive markets, the imposition of a minimum wage provides a classic example of a government distortion that creates negative side effects in the marketplace.
The graph below shows a hypothetical competitive local labor market. The market demand curve for labor is DD, and the market supply curve is SS. Their intersection determines the competitive wage, Wc, with employment Ec.
In the US economy, low wages are usually paid to entry-level workers, but those workers usually do not earn these wages for extended periods of time. Indeed, research indicates that nearly two-thirds of minimum wage workers move above that wage within one year.
Seventy years of empirical research generally finds that the higher the minimum wage increase is relative to the competitive wage level, the greater the loss in employment opportunities. A decision to increase the minimum wage is not cost-free; someone has to pay for it, and the research shows that low-skill youth pay for it by losing their jobs, while consumers also pay for it with higher prices.
While they are often low-paid, entry-level jobs are vitally important for young and low skill workers because they allow people to establish a track record, to learn skills, and to advance over time to a better-paying job. Thus, in trying to fix a perceived problem with minimum wage laws, policymakers cause collateral damage by reducing the number of entry-level jobs. As Milton Friedman noted, “The minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills".
If empirical evidence has proven this theory to be correct as you point out very well, then why doesn't the government recognize this and allow for a free wage market?
ReplyDeleteThe minimum wage theory as you point out is clear, so why doesn't the government realize this and eliminate the minimum wage?
ReplyDeleteOur friend “Q” asks the fundamental question of government regulation. If government regulation causes distortions in the free market and these distortions have a negative impact on the economy why does the government continue with this policy? The answer to this question is to follow the money. Very few voters realize that minimum wage laws are counterproductive. Voting to raise the minimum wage gives politicians another reason to beat their chests and boast about the “good” that they are accomplishing.
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