June 13, 2020

Does Minimum Wage Help or Harm Workers?

Economic models predict that introducing/increasing minimum wage should result in high unemployment, but that doesn’t seem to be borne out in the real world. Maybe because we don’t live in a fully competitive market, many firms actually receive some producer-surplus, and this is what is reduced by minimum wage laws (and it would only start to affect unemployment levels once the producer surplus reached 0)? theatlantic.com/business/archive/2017/01/economism-and-the-minimum-wage/513155/

Small employers in particular have limited flexibility; at their scale, they may not be able to maintain their operations with fewer workers. (Imagine a local copy shop: No matter how fast the copy machine is, there still needs to be one person to deal with customers.) Therefore, some companies can’t lay off employees if the minimum wage is increased. At the other extreme, very large employers may have enough market power that the usual supply-and-demand model doesn’t apply to them. They can reduce the wage level by hiring fewer workers (only those willing to work for low pay), just as a monopolist can boost prices by cutting production (think of an oil cartel, for example). A minimum wage forces them to pay more, which eliminates the incentive to minimize their workforce.