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From Seattle to South Carolina: The Changing Landscape of Minimum Wage in America

November 20, 2016

VIA MARKET MAD HOUSE 

In present-day America, the minimum wage issue plagues politicians, economists, and students alike. However, despite its prevalence in today’s media, most people do not completely grasp the issue. To put it simply, minimum wage refers to the minimum hourly wage that an employer can pay his or her worker according to the law. The minimum wage varies in amount across the nation. Some states, such as Washington, have implemented a gradual increase to a 15-dollar minimum wage. On the opposite end of the spectrum, states such as Alabama and South Carolina have not implemented a minimum wage.

 

I believe that minimum wage should be increased from $7.25 to $10.10, due to increased worker productivity, consumer spending, and a negligible amount of resulting unemployment compared with the current state of affairs. In the free market, a worker’s wage is determined by where the supply curve and demand of labor curve intersect. However, this equilibrium is not necessarily the socially optimal equilibrium in the eyes of both the government and the workers who work for such a wage. Thus, the government enforces a binding wage floor, known as minimum wage, with the intentions of protecting low-wage workers. This causes the quantity of labour supplied by individual workers (the number of workers who are willing to work) to be greater than the quantity of labor demanded by firms, resulting in a surplus: unemployment. Despite the unemployment caused, research studies have showed that shifts in demand for labour offset the unemployment, and restore the market to a state of equilibrium. Also, if one assumes that workers are encouraged by monetary incentive, an increase in their wage correlates with an increase in their productivity. If a worker’s productivity increases, because MRP (which represents the firm’s demand for labor) = (MP)(P), MRP will increase. If the demand for labour shifts right, it will restore the market to a new equilibrium. Thus, a minimum wage will not, for the most part, cause excessive unemployment, and will instead be an effective price floor. Workers with increased wages would possibly not only be more productive but also more loyal to their bosses, a beneficial result for the firm, especially for small businesses and start-up companies with a small number of workers.

 

One criticism of a minimum wage increase is that it will lead to excessive unemployment if a change in demand does not offset the wage floor. Theoretically, a minimum wage increase causes unemployment, but a 2010 study by economists Dube, Lester, and Reich proved otherwise. The study controlled extraneous variables, and "compared employment differences across contiguous U.S. counties with different levels of the minimum wage" (Schmitt, 8). Their experiment took place over a 16-year period, a longitudinal study which allowed them to analyze the long-term effects of minimum wage increases; the study also involved the comparison between different counties’ minimum wages and their resulting employment rates. They concluded that "minimum wage increases...have strong earnings effects and no employment effects" (Reich, 961), and that despite certain regional fluctuations in data, increases in minimum wage did not cause employment levels to decrease. One possible explanation for the lack of change of employment could be attributed to benefits that low-income individuals receive.

 

Some opponents to an increase in minimum wage believe that minimum wage will cause businesses to shut down due to the firm’s increased cost relating to having to pay workers higher wages. Minimum wage represents a variable cost which increases as the number of workers the firm hires increases. An increase in such a variable cost causes the firm’s average variable cost, and thus its average total cost (the firm’s average variable cost and the firm’s fixed cost added) increases. When a firm’s cost of production increases, they are more likely to limit their production and eventually, hire less workers. If the costs of production are too high (such that the price of the product is less than the average variable cost), the firm will shut down. However, this is a theoretical argument. However, according to Reich’s study, when workers receive a higher wage, they are able to purchase more goods. If the worker’s demand for their firm’s product increases, then the demand for the firm’s output will increase, which could potentially offset the costs the firm would experience because of the increased wages. A higher minimum wage should be enforced. It is beneficial to all parties involved, and would lead to a stronger economy and government.

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