In my last few articles, I have discussed some of the benefits of raising the federal minimum wage and why we should regulate the federal minimum wage outside of politics. While I have clarified my stance, hearing perspectives from the other side of the aisle is essential. As an economics student who likes to get the complete picture of any issue I am discussing, it would be a disservice to you, the reader, and Myself if I did not fully flesh out this contentious issue. In this article, I will address the issue of Unemployment and the minimum wage.
When considering arguments against raising the federal minimum wage, the first and most obvious example is a possible increase in the unemployment rate. As we have discussed, raising the federal minimum wage to $15 an hour could lift 1.9 to 4 million people out of poverty. Of course, there is also the flip side of the minimum wage. Often, raises in minimum wage have the unintended consequence of reducing jobs in the market. When hourly wages increase, companies in the market respond by laying off workers to keep their costs similar to the levels before the price increase. In a Perfectly competitive market, we can model this by setting a price floor in the Wage Market (See Figure 1).
The market adjusts up to the price floor, creating a labor surplus. Instead of the labor market being dynamically stable around the equilibrium price in the market, the price of labor is forced to stay at the minimum wage, perpetuating the Unemployment of workers in the surplus of the market. Of course, it is not surprising that if the federal minimum wage is raised to $ 15 $ an hour, it could help 27 million workers at the cost of 1.3 million jobs. Often, the lost jobs belong to smaller companies and so-called ‘ mom-and-pop shops’ that can only adjust to wage increases with significant corporate backing.
But job loss isn’t necessarily a certainty. The model above shows that a Federal Minimum wage will reduce efficiency in the labor market and create Unemployment. But this is only part of the story. The above model addresses “Perfect Competition,” which is very particular. In perfect competition, there are few entry bars for buyers, such as companies, sellers, and workers. Buyers and sellers have free entry and exit of the market, and the sellers produce similar goods.
And most importantly, buyers and sellers cannot influence the market’s labor price. Of course, in real life, various jobs have high barriers to entry, like education and experience, and companies can set the wages they pay their workers in multiple ways. Imagine a small town with a single steel factory. If you have little mobility and little education, your only option is to work at the steel factory like everyone else. What other options do you have?
In these cases, it can be helpful to model the minimum wage in a monopsony rather than perfect competition. In a monopsony, the buyer (in the labor market, the company providing work) influences the price of labor. So, rather than relying on the market to set the price of labor, a monopsony uses its market power to push the wage down as far as possible. In cases like this, increasing the minimum wage can improve the well-being of workers without increasing Unemployment dramatically (See Figure 2).
So why does this matter? Why are we talking about perfect competition and monopsonies? Like most things, an overarching broad statement like raising the minimum wage must include crucial details. Rather than applying a one-size-fits-all solution to a problem, breaking the problem into individual pieces is essential. Economists, not politicians, are ideally situated to break these nuanced parts down and manage market inefficiencies to increase prosperity and well-being for buyers and sellers. Rather than relying on Congress to yell about a political one-size-fits-all solution, let the pros deal with this complicated problem and produce effective and nuanced policy through a committee or federal organization. As we have discussed, other countries Use this approach when raising the minimum wage. It’s time for the United States to do the same.