No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Six: Applications in Markets 131 Instead, let’s assume the market-clearing price for unskilled labor is $5.15/hr., the current minimum wage is $6.45/hr., and the proposed legislation would take the minimum wage to $7.25/hr., as seen in Figure 6.1 . The current minimum wage of $6.45 leaves the number of workers wanting work at that wage (Q S1 ) exceeding the number of jobs offered by employers. (Q D1 ). Some of these workers are marginal workers that only want to work at the higher wage; they are looking for employment at $6.45/hr. and would be unwilling to work at $5.15/hr. The number of these workers is the difference between Q S1 and Q*. While we can sympathize with these unemployed workers, our true sorrow goes to the workers who are willing to work for $5.15/hr., but who are not able to find jobs at $6.45/hr. The number of these workers is the difference between Q* and Q D1 in Figure 6.1 . When the subsequent rise to $7.25 occurs, the problem of the surplus will simply be exacerbated, since Q D2 << Q S2 and is much larger than Q D1 <Q S1 . More marginal workers, who are unwilling to work at the market-clearing wage, will begin looking for work and not find it at $7.25/hr. More workers who would like to work at $5.15/hr., or even $6.45/hr., will be made illegal to hire. $15/HR MINIMUM WAGE IN SEATTLE, BEFORE AND AFTER Seattle implemented a large increase in the minimum wage in 2014, leading to $15/hr by 2021. Watch these two videos to see how some related to the proposed change and then some results in the aftermath. The results are still debated, but the theory is not. If there is no harm to minimum wage increases, then clearly $15/hr is far too little. Why not $50/hr? That is a serious question. Remember, in economics, we are thinking on the margin. Is there any reason to believe we don’t have employers somewhere on the margin of whether to hire another worker or not? What do you predict those marginal employers will do? Figure 6.1, Increase in the minimum wage for Labor (N). With the minimum wage set equal to the market clearing wage for labor at $5.15 per hour, plans of workers and employers are “dovetailed”: everyone who wants to work or hire someone at that wage is able to. If minimum wage is increased to $6.45/hour, with no change in underlying demand or supply fundamentals, the result will be the quantity supplied will exceed quantity demanded. Many will desire work at the prevailing wage and will be unable to find it. If the wage is further increased, the gap becomes larger, with more workers unable to find jobs. Note that some previously employed will be let go, as the new quantity demanded is less than Q*. P N($) Q N(#) Q S1 7.25 6.45 Q D1 D N S N Q D2 5.15 Q S2 Q * >> > Q D2 Q S2 Q D1 Q S1 Market-clearing price: In any market, the equilibrium (or market clearing) price allows all producers that want to sell and all consumers who wish to purchase to exchange at that price. Seattle Restaurants Torn Over Minimum Wage Hike Seattle’s $15 Minimum Wage is Hurting the Workers It’s Intending to Help

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