Economic Perspective on the Minimum Wage

[RI]

I'm currently taking a microeconomics class at my university, and I'm contemplating going for double major with one of my degrees being in Economics (I've taken macro already). We were talking about the basics of price controls, and we got to the minimum wage as a price floor.

According to microeconomics, the minimum wage should create unemployment because it creates an surplus of demand for jobs by not letting wages reach equilibrium price. However, wouldn't the increase in wages increase consumer spending (along the far left portions consumption schedule) and therefore increase aggregate demand, which would reduce unemployment (assuming enough people aren't laid off to counteract this)? I could be wrong on that, I really don't know.

My point of this thread is to ask what the whole economic view on the issue is. I really want to understand this stuff as fully as I can.

[phk]

A lot of the work and ideas you speak at the micro level operate on the assumption of "all else held equal" and what time horizon the micro and macro events differ by (the short run vs long run).

From a microeconomic point of view you basically have a profit function that operates as such.

max Σ^∞_i=0[P*Q - C(Q)]

Which is TR-TC = TP
TC consists of both Fixed and Variable Costs. These include things like Rent, Utilities, Wages, Salaries.

Assuming that we fix
1.) Amount of employees
2.) Productivity of employees

An increase in wages will make each employee more expensive. Now since economists like to think "at the margin" this means the marginal employee will become more expensive and thus laid off.

[opebo]

Leaving aside that such a system is an acceptance of subjugation, and thus politically unappealing to a thinking majority, even if we accept the idea that workers should work and owners own, the fact remains that the social ills caused by low wages are far more expensive (externalities), than any 'gain' in economic terms as represented by the theory.

[The Economist]

Basically the minimum wage in theory and practice are kind of different things. In theory, the minimum wage should increase unemployment but it doesn't. Hikes in the minimum wage increase the marginal cost of each worker, yes, thus precipitating layoffs but per se, the market floor may be higher than the current minimum wage for some areas thus unemployment would be different.

However, if you look at when they raised it to $7.25, teen unemployment rose dramatically, since they were the least skilled people and thus it was pointless to employ them.

[Person Man]

Thus you have your marginal employee theory. Then again, RI is simply wondering if increase money in the pocket of workers will cause increase spending thus increased revenue for the various firms and whether these firms will be able to afford to keep and need additional help. The interesting thing is that in some businesses, even though you need new help, it doesn't mean you can afford it. As a result, a lot of businesses shut down because its simply too expensive to operate their business. For example, I worked at a taco place in college. They paid their workers $8 an hour. They always had more business than they could handle simply because their revenue was too low to hire anyone else and no one was willing to work for what they could afford.

[opebo]

...the market floor may be higher than the current minimum wage for some areas

I think this is the case for the vast majority of minimum wage jobs in the US, as if they were transportable (industry), they've already left.  Minimum wage jobs (and to a large extent the vast majority of all jobs) in the US are about preparing and selling food, and selling cheap shoddy products.  The per-employee profit in such concerns is enormously more than $7.25/hour, and in any case in a non-outsourcable industry, if all concerns have their employee costs raised equally, the net result is that revenue can be automatically increased to cover the increased cost (and this is where the increase in spending by said poors on shoddy goods and unhealthy fast food comes to the rescue).

[The Economist]

Thus you have your marginal employee theory. Then again, RI is simply wondering if increase money in the pocket of workers will cause increase spending thus increased revenue for the various firms and whether these firms will be able to afford to keep and need additional help. The interesting thing is that in some businesses, even though you need new help, it doesn't mean you can afford it. As a result, a lot of businesses shut down because its simply too expensive to operate their business. For example, I worked at a taco place in college. They paid their workers $8 an hour. They always had more business than they could handle simply because their revenue was too low to hire anyone else and no one was willing to work for what they could afford.

The problem of course with this as people have stated is that increased wages also equate to increased costs for the firms, which leads to decreased profits. So it's not all that great to raise the minimum wage (especially in competitive market situations; but per se, they don't really exist in practical reality a lot of the time).

[Gustaf]

I'm currently taking a microeconomics class at my university, and I'm contemplating going for double major with one of my degrees being in Economics (I've taken macro already). We were talking about the basics of price controls, and we got to the minimum wage as a price floor.

According to microeconomics, the minimum wage should create unemployment because it creates an surplus of demand for jobs by not letting wages reach equilibrium price. However, wouldn't the increase in wages increase consumer spending (along the far left portions consumption schedule) and therefore increase aggregate demand, which would reduce unemployment (assuming enough people aren't laid off to counteract this)? I could be wrong on that, I really don't know.

My point of this thread is to ask what the whole economic view on the issue is. I really want to understand this stuff as fully as I can.

The problem with your argument is that all the extra money paid out to the minimum wage worker will not be spent on consumption. Besides, the increase in cost will lead to companies increasing prices which will lower demand.

Minimum wages might be reasonable if low wages aren't set competitively in the first place and are too low. It may also help to weed out certain practices that society might view as bad even if they are compatible with clearing markets.

[True Federalist (진정한 연방 주의자)]

Thus you have your marginal employee theory. Then again, RI is simply wondering if increase money in the pocket of workers will cause increase spending thus increased revenue for the various firms and whether these firms will be able to afford to keep and need additional help. The interesting thing is that in some businesses, even though you need new help, it doesn't mean you can afford it. As a result, a lot of businesses shut down because its simply too expensive to operate their business. For example, I worked at a taco place in college. They paid their workers $8 an hour. They always had more business than they could handle simply because their revenue was too low to hire anyone else and no one was willing to work for what they could afford.

If they truly had more business than they could handle, then they could have raised the prices of their tacos.  That would have given them some combination of more revenue to hire more people at better wages and a lower demand for their product that they could handle with the available workforce.  More likely, it made sense for them to not staff at a level that avoided lines during the lunch rush, or raise prices to the point they wouldn't have a lunch rush.