How Higher Minimum Wage Leads to Higher Unemployment

Elementary economics considers the relationship between supply and demand.

But it can’t be what Barack Obama considers when pandering to the masses with his recommendation that Congress mandate a higher minimum wage.

For example, the above-left figure shows a hypothetical free market at equilibrium: a quantity of 7 employees are demanded and supplied to employers for a price of $30 each.

Tending Toward Equilibrium

If the quantity of employees available in supply were reduced to 6 (with the level of demand remaining the same), then the supply curve would shift leftward, raising the price for each employee to $40 at the new equilibrium.

Likewise, if the quantity of labor supply were increased to 8 employees, the supply curve would shift rightward, resulting in a price of $20 that employers would pay for each employee at the new equilibrium.

But what would happen to the employees in our hypothetical labor supply if government were to intervene and mandate a price floor for them through a $50 minimum wage?

Loss of Balance

Theoretically, equilibrium would only exist naturally at the mandated price under two conditions in our hypothetical labor market:

  1. Employer demand a supply of 9 employees when only 7 are still available, thus shifting the demand curve rightward to meet the new equilibrium.
  2. Labor supply available decreases from 7 to 5 employees with employer demand remaining constant, thus shifting the supply curve leftward to the new equilibrium.

Otherwise, the government mandate for a price floor of $50 creates disequilibrium in society through new unemployment for 4 employees.

It’s the difference between the quantity of 9 employees now available from the labor supply and employers only hiring the quantity of 5 employees that they’re able to demand at the higher, government-mandated price (see above-right figure).

Mind Over Matter

“Help entrepreneurs and small-business owners expand and create new jobs,” Obama said in the 2013 State of the Union, when he recommended that Congress mandate a higher price floor in wages. “But none of it will matter unless we also equip our citizens with the skills and training to fill those jobs.”

None of it will matter, indeed, if Obama succeeds in mandating that entrepreneurs and small-business owners spend more to fill jobs with incentives for higher unemployment.

References

Keith Hennessey, Why stop at $9? A $90 minimum wage, Your Guide to American Economic Policy, February 12, 2013, accessed February 13, 2013, http://keithhennessey.com/2013/02/12/minimum-wage.

N. Gregory Mankiw, Principles of Economics, 5th ed. (Mason: Cengage Learning, 2009).

Office of the Press Secretary, “Remarks by the President in the State of the Union Address,” The White House, February 12, 2013, accessed February 14, 2013, http://www.whitehouse.gov/the-press-office/2013/02/12/remarks-president-state-union-address.

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One thought on “How Higher Minimum Wage Leads to Higher Unemployment

  1. Why do we want to raise the minimum raise after all isn’t this a form of slavery to keep people not to go nowhere in life that’s why what Obama is doing I am against

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