Minimum Wage and Price Floors

Basic Economic Theory

• Graph Representation:
  • X-axis: Quantity of labor
  • Y-axis: Price of labor (wages)
  • Demand: Downward sloping (companies hiring workers)
  • Supply: Upward sloping (workers selling labor)
• Equilibrium:
  • Labor quantity: Q0
  • Wage rate: W0

Effects of Minimum Wage

• High Minimum Wage:
  • Set above equilibrium wage
  • Quantity Supplied (QS): Increases as more workers want higher wages
  • Quantity Demanded: Decreases as employers hire fewer workers
  • Outcome: Surplus of workers, leading to unemployment
• Winners:
  • Workers retaining jobs at higher wages
  • Transfer of surplus from employers to workers

Controversy and Research

• Empirical research shows little/no decrease in employment with wage increases
• Advocates argue basic economic principles don't apply to low-skill labor markets
• Reasons they might be wrong:
  • Small Increases: Historically, wage increases are small and impact a small population
  • Focus on Jobs, Not Hours: Research often overlooks hours cut or changes in compensation beyond wages

Real-World Complications

• Reality is more complex than simple models
• Adjustment Over Time:
  • Gradual change in employment, not instant drop
  • Example: Transition to digital menus in restaurants
• Past research may miss gradual adjustments, showing no immediate impact

Academic Research

• Study with Jeremy West published in top labor economics journal:
  • Findings: High minimum wages slow job growth
  • Impact: Jobs not created, hindering experience/skill gain

Affected Groups

• Minimum wage often targets unintended groups, e.g., teenage children of middle/upper-class families
• Blunt Instrument: Does not distinguish between different socio-economic groups
• Negative effects concentrated among high school dropouts and minorities

Conclusion

• Economic principles hold despite complexities and good intentions
• Interested individuals can refer to a debate video on the implications of a $15/hr minimum wage in Texas

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These notes provide a summary of the economic implications and controversies surrounding minimum wage policies, as well as insights from academic research on the subject.