Raising the minimum wage is something that the lower waged workers of society are demanding, so why not raise the minimum wage? This consensus comes from the misconceptions given to us by current theories presented which are that of increasing of minimum wage will directly increase the laborers standard of living. How will increasing the minimum wage cause increases in productivity and efficiency?
There is absolutely no economic law that suggests increasing the minimum wage will increase the proficiency of the market economy. People that do not understand the dynamics of economic theory create misconceptions that create this post hoc assumption that increasing the minimum wage will increase employment, and will increase the standard of living. One very interesting “empirical evidence” that employment does not drop, comes from the fable of the advancing economy of Washington. According to the B.L.S it seems that the unemployment rate is at a steady decline. Considering Washington has the highest minimum wage in the United States, we see the fable that increasing the minimum wage does not cause unemployment with this empirical “cut and dry” case.
However, while looking at the employment graphs in correlation with the age level we see teenage unemployment is much higher than the United States average. Considering teenage unemployment is higher in washington is perfectly explained through economic analysis. The fact that minimum wage hikes happened most densely in the washington area has caused a surplus of labor. How will minimum wage cause a surplus of labor?
When the supply of labor is ascending through its supply schedule it hits a point where the two separate schedules meet and interlock. This is referred to as the present state of rest. This occurs when everyone demanding labor and everyone supplying labor, at a given price, can leave the labor market at a state of rest. Such as a willing person to exchange their labor for greater than $10/hr, while the demander of labor will not pay more than $11/hr for the labor. So, the catallactics suggest that the price for the state of rest is between $10/hr and $11/hr.
Minimum wage is an outside coercive entity, the state, forcing a price floor on the market. This aggression against the dynamic functions of the market pushes the price above the state of rest. When this occurs, the demand for labor will ascend backwards on the schedule, while the supply of labor will ascend forward. This will always cause a surplus of labor, simply because at the new price there is a excess amount of people willing to work at the low-wage level. Yet, the people demanding the labor will reduce their quantity-demanded. So, therefore, there is no longer a market clearing price.
So, how do we look at the teenage rising unemployment rate to give empirical proof that this occurs? Certain firms are now faced with an ultimatum. One choice is to reduce the interest income owed to the capitalists who have advanced capital. The first choice will cause investment to decline and will force the business to close. The second choice, then, is to boost the firm’s entrepreneurial ability to reduce expenditures in other factors of production in order to maintain the employment of labor. This becomes very problematic for small-business, because they have less room to cut factor prices.
However, the marginal firm that can maintain production after the wage hikes now are employing a factor of production at a higher wage level, higher than the market rate. This induces the business owner to decide to pick La Crème de la crème, meaning they will go for a laborer that has a less risk factor. How will they look at risk factors? Easy, they just need to assume with people between 16-19 are far less reliable than the average adult. Also, 21-25 would be a little more dependable, in the eyes of the business owner. At last the business owner reaches their target employee at the age of 25-39. Why not choose people younger than 25? Because life experience has all taught us too well that youthful energy, rather fun at times, can be very undependable in regards to responsibility and maturity.
So then what occurs? We see a crowding out effect emerge in minimum wage level jobs because now the minimum wage level job seems more lucrative than before, and the employer is much more stricter. So people that were at one point unwilling to work for $10/hr now are willing to work at $13/hr, and the people with the least amount of experience are truly shafted. This turns into a vicious circle, in the long-run, because now when that teenager who was forced out of the labor market through aggression becomes an adult no longer has any experience. So, now measuring the “risk-factor” of the potential employee, the employer is becoming less impressed with the same person who has now reached the age of 25. Therefore, the long-term effects of raising the minimum wage causes forced unemployment in exchange for voluntary unemployment.
How does this affect the production cycle? When the laborers now receive a higher wage, higher than the market clearing wage, the laborer will then go around and spend this money. What happens next is the intertemporal market needs to adjust to rectify new spending patterns. So when the present output capacity of the production cycle is at the level of X, the increased spending into the products will signal to producers to increase production. When that occurs, considering we are holding the present supply, X constant; the only option for the market to equilibrate itself is for producers to raise the prices from p to p’ . When the prices raise, as a result of the wealth effect, we see increased production. This is where the proponents of minimum wage hikes fall apart.
When the prices raise, we increase production, however the wages of laborers have only increased nominally and not in real terms. The fact that the nominal wage increase correlates with the increase in prices we will actually see the real wages of the laborers drop. This is because now, in the aggregate, prices have risen (p to p’). The worst effect is what occurs after the prices rise and the market adjusts to the new nominal wealth levels; the production cycle is still in full force due to the initial price increase and now there is an abundance of supply that can no longer meet demand causing surpluses. However; since the coercive force of the state has aggressively forced higher wages; the firm can no longer drop the prices, from p’ back to p, in response to the newly achieved surplus. This is due to the fact that now factor prices are propped up artificially, there is downward nominal wage rigidity which cause a ratchet effect on consumption prices. Thus, when next round of production occurs the firms create a lot less output, resulting in a shrinking level of output.
It is clear from our analysis that the wishes of the labor market to raise the minimum wage will result in inefficiency, and a subjective drop in consumption. The laborers wishing to improve their standard of living will cause an over inflated consumption market, crowding out of teenage labor, and involuntary unemployment.