Comments on: Apparently, the Presence of a Minimum Wage Increases Unemployment

By: Chance

Chance — Tue, 07 Jun 2011 18:59:00 +0000

Sorry if I've covered ground covered by others already, but the 'x' in x number of jobs is not necessarily constant. guess the only explanation I could see would be employers consolidating multiple positions into fewer due to gains in productivity from higher-quality workers

That's part of it. Also, people can be replaced by machines. For instance, if it is cheaper to add new self-checkouts at a grocery store than it is to have say, six, employees, they will move in that direction. They do so anyway, but the argument is that this move is hastened by increases in the cost of employees.

Another argument is that positions that used to exist no longer exist, i.e. bathroom attendants and others that existed before I was born (maybe service station attendants, but that may be motivated by fact people don't mind pumping their own gas).

Also, businesses that are marginally profitable may not be able to afford the new minimum wage and may close down.

So, the variable x is just that, a variable.

By: Rich Lawson

Rich Lawson — Mon, 13 Jul 2009 01:33:09 +0000

This is a great book on understanding all there is to know about economics.
http://www.amazon.com/Economics-One-Lesson-Henr…

Another great book recently released is “The Mind of the Market, How Biology and Psycholgy Shape our Economic Lives”, by Michael Shermer teaches economics is relation to evolutionary theory.
http://www.amazon.com/Mind-Market-Biology-Psych…

I just found your site today, but like what I see, I'll definitely be reading more of your work.

By: Rich Lawson

Rich Lawson — Sun, 12 Jul 2009 21:33:09 +0000

By: Daniel Miessler

Daniel Miessler — Mon, 05 Jan 2009 03:21:13 +0000

Great explanation, thanks.

By: Daniel Miessler

Daniel Miessler — Mon, 05 Jan 2009 03:21:11 +0000

It does make sense. Thanks, Blake.

By: Daniel Miessler

Daniel Miessler — Sun, 04 Jan 2009 22:21:13 +0000

Great explanation, thanks.

By: johanreichert

johanreichert — Sun, 04 Jan 2009 08:57:06 +0000

The idea of the minimum wage is basically that of a price floor. If you've not heard of the concept before (sorry if you have, this will be redundant), a price floor is basically an attempt to transfer wealth from consumers to producers of a given good. Imagine a market for tomatoes, where the market price is $1 per pound. But the government wants to make sure tomato farmers are doing well so it sets a price floor for tomatos of $4 per pound. On the face of it, this seems good. But tomato consumers are sensitive to price, and will consume fewer tomatoes when they cost more. So the total number of tomatoes that the farmers are able to sell will actually be smaller, even though the amount the farmers get for the tomatoes they do sell will be greater. This usually works to the benefit of some of the tomato farmers -- the ones lucky enough to sell their tomatoes first -- but not all of them. Any excess tomatoes, which would normally be sold for less than the $4 per pound will rot, because everyone who is willing to pay $4 per pound for tomatoes will have done it already.

The same thing is true in the labor market. When the price for unskilled labor is set by the government above the market price, it means that those workers without skills who can get jobs will be better off, but those who can't will be worse off. And unlike in the market for tomatoes, there are characteristics of workers that allow them to differentiate themselves from their competitors, which means that the more experienced will be in a better position to get jobs then their younger and less experienced competition.

All of this assumes a downward sloping demand curve for labor, which evidence suggests does exist. And a downward sloping demand curve for labor means that there aren't a set number of jobs, but that the number of available jobs depends on the price that employers will have to pay for labor. The higher the cost for labor, the smaller the number of laborers employers will be willing to employ. It's possible to substitute machines for people to accomplish certain tasks, and the greater the cost of labor, the more attractive machines become.

Read en.wikipedia.org/wiki/Price_Floor for more on price floors. Once you understand the nature of a price floor, the minimum wage, and why it can be detrimental to employment prospects of unskilled labor is an easier concept to grasp.

The main fight among economists isn't whether or not a minimum wage can influence employment; it's pretty much agreed that it can and that it does. The qeusiton is to what degree the minimum wage influences employment.. This depends on the equlibrium price for unskilled labor, and how divergent it is from the minimum wage. Those numbers are hotly debated.

By: Blake

Blake — Sun, 04 Jan 2009 02:18:50 +0000

I think the idea is that some people's labor might be worth less than the minimum wage. Assuming these people are somehow marked as low-wage people, no one will hire them. If the minimum wage was $5 and two people were going for the same job paying the minimum wage, the employer would rather pay the wage to the person whose labor is more valuable. This means that, given a large amount of workers whose labor is valued at the minimum wage (which usually follows from a large amount of all workers in the market) those whose labor is worth less than the minimum wage will not be employed.

As the wikipedia mentions, this also assumes a large amount of employers because if the market wage is less than many workers are willing to accept and a minimum wage greater than the market wage is implemented more people will work.

In the real world, this doesn't necessarily work because employers are not able to observe what wage people are willing to accept. Also, there is a very large cost to employers to hiring (training) and firing (severance, reputation, replacement) workers. This disrupts the equilibrium because companies might not make changes to the work force when an efficient market would require it.

Hope that makes sense.

Blake