This article was contributed by a reader (MSc Economics)
In the online sphere, you can read many articles showing empirical evidence that shows the minimum wage is not a bad idea. Recently, I read an article that basically argued that evidence shows that despite what economists have been saying, raising the minimum wage did not cause unemployment, or that unemployment increased incrementally or minimally. And basically econometric analysis does not have conclusive results one way or the other.
This economics paper attempts to explain to economics students why such views are wrong, and that the minimum wage is not a good idea. In fact, most - but of course not all - distortions of the free market are not good. To steal some beautiful lines from J. M. Keynes, we "have involved ourselves in a colossal muddle, having blundered in the control of a delicate machine, the working of which we do not understand." I stole these lines because I like them.
Before I begin, and to rebut an article that said most ECONS101 teachings on the minimum wage are wrong, the economic theory that we promulgate is as such:
A minimum wage is a minimum legislated or mandated wage.
If it it set above the market clearing level, then it will be effective - and if it is set too low, then it will not be effective as the market clearing equilibrium wage will be higher than the legislated or mandated wage.
In economic theory, assuming a perfectly competitive market, when the minimum wage is effective, the quantity demanded of labour should decrease, while the quantity supplied should increase. Assuming that this happens, then there is an increase in unemployment, ceteris paribus (the famous all other factors remaining constant). And the higher the minimum wage, the higher the unemployment should be.
However...
Fact: Not all countries experienced a fall in employment after implementing minimum wages.
Does this actually mean that there is something wrong with the economic theory? No - it means that either the wage is set too low, or other factors weren't held constant. And indeed that was the case. When I was reading my undergrad in the UK for a stretch the minimum wage was 7 pounds an hour. Assuming one worked 10 hours a day, that was 70 pounds. And for a month that would have been 70 x 20 working days, which would be 1400 pounds. Now, given that my UK-based classmates earned 50,000 pounds per year, and some even earned much, much more... You can come to the conclusion that maybe the real market clearing wage rate was much higher. Not a real criticism. In other cases, when you examine the evidence, it turns out that minimum wages don't mean much when the economy is undergoing a boom. When real wages are rising, minimum wages don't mean that much.
But for those countries which did not have a boom or where minimum wages were really high, youth unemployment rose - because the people this policy was supposed to help were precisely the ones hurt by it. You can check out the facts for your own consideration - but it is true that some studies show that unemployment rose among the groups with the minimum wage. In some countries, youth unemployment is much higher than other types of unemployment measures. Nothing is wrong with the theory, but it just needs to be refined.
Now, as for the economic arguments that some labour markets are monopsonistic or monopolistic-competitive or oligopolistic etc, that is an argument for another time - and I promise you that eventually I will come back to discuss that.
To be clear, there are other reasons - non-economic reasons - why there could be minimum wages. I don't believe such normative economic analysis, but they are there. This economic paper is not one of them. Just do not diss simple economic models because of a wrong understanding of how they operate and explain - or do not explain - the economic world.
JC Economics Essays - Special thanks to our readers for their kind contributions. Just like the previous opinion piece, this economics perspectives essay is also contributed by SS.
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