Monday, November 23, 2009

Econ 110 Moment

I just thought I would share with y'all a quick thought from Econ 110.  This is a principle that is understood by most if not all people with any backbround in economics, but little understood by most people.

The argument is often made that a higher minimum wage will benefit the lower social classes, but this is untrue.
A higher minimum wage increases unemployment among uneducated and unskilled workers. 
The main point is that an increase in minimum wage means that firms must pay more for their employees.  As the price of employees increases, firms will decide that they cannot afford or do not need as many.  Less people will have jobs and, given the ultimatum, guess who firms are going to choose not to hire?  That's right.  The uneducated and the unskilled.
Also, because the wage is higher, more people will want to go to work who would otherwise stay at home.  This influx of workers will either crowd out other workers, or simply find that jobs are not available.

If anyone wants to add or correct this explanation, please feel free.  This has been your Econ 110 moment.


  1. I have to agree with you. People may not think about it, but a higher minimum wage has certain draw backs. Employers have to pay employees more and in turn have to raise their prices so that they can pay their employees. So the consumer pays for it.

  2. Also, the educated and skilled worker wages will increase because more of them will enter the job market and when the demand for work increases, the wage increases as well. So, minimum wage hurts the lower, unskilled and uneducated social class while benefiting the rich and educated social class. Where's Robin Hood when we need him? :)

  3. Your Econ 101 source must be a Reaganite trickle-down economist. For those of us who remember history, the lack of a minimum wage leads employers to pay as little as possible generating a spiral to the bottom. Witness the plights of migrant farm laborers, coal miners, and early 20th century factory workers. It took the solidarity of labor unions to force employers to pay living wages. This is not to say that the minimum wage is a perfect solution. Higher wages do generate higher costs. A balance needs to be struck such that the lowest wage is sufficient to enable the unskilled worker to escape the poverty trap and become a productive, contributing member of society but not excessive that it creates unbearable costs for the rest of the economy.

    Trickle-down as a panacea is a convenient pipe-dream of people at the top of the pile who wish to justify their good fortune and shirk their moras responsibilities for the people at the bottom of the pile.

  4. That is the interesting thing about most all theories and real-life application. The truth seems to always be somewhere in the middle.