Minimum Wage Explained

Minimum Wage Explained

There is a national movement to raise the minimum wage to $15 per hour. These jobs currently pay from $7 to $10 per hour. A few fast food employees in larger cities are protesting and demanding a raise in their wage rate. They are not guaranteeing an equal improvement in their productivity. So they really want more money for the same amount of work. They don’t understand basic economics.

One of the first principles students learn in an introductory economics class is the supply and demand curves. Supply and demand curves usually covers goods and services, but can also represent the demand for labor by employers and the supply of workers in the labor force. The wage rate is simply the price of labor.

The figure above is a simplified supply and demand graph of the effect of the minimum wage on employment. The price of labor (Wages) is shown on the y-axis and the quantity of labor (Number of Workers) is shown on the x-axis. The red line (D) is the demand for labor and the green line (S) is the supply of labor. If wages were high, there would be a large number of people willing to work at that wage (the supply of labor), but employers would not hire very many at a high wage. If wages were low, the opposite would occur.

In each specific market, like newly hired fast food workers, there will be an equilibrium point (E) where the lines cross. This is the number of workers that will be hired at that wage. If the minimum wage is set above the equilibrium point, the number of workers employed will be (A) while the number of workers that would be willing to work in that job for that wage will be (B). The number of workers between A and B is the number now unemployed due to the rise in the wages above the equilibrium point. The number from A to E are the workers that got laid off due to the rise in the minimum wage, and the number from E to B are the workers that started looking for that job at that wage but can’t find one.

Raising the minimum wage gives a small increase in wages to some employees, but other employees lose everything when they are laid off. That is the reality of imposing a minimum wage that the proponents don’t want to discuss. Whenever government interferes with the free market system, the result is a distortion in the system resulting in a suboptimal outcome.