Minimum wage hike? Understand economics
By Mark C. Schug And Gordon D. Gaster
Economic illiteracy among American voters is a high cost for the most vulnerable in our society. The newly resuscitated debate regarding the minimum wage is just the latest example.
A November 2013 Gallup Poll found that more than three-quarters of Americans — 76% — say they would vote for raising the minimum wage to $9 per hour (it is currently $7.25). Only about one-fifth — 22% — would vote against it.
Folks with a basic understanding of economics scratch their heads in wonder at this sort of news. As any economist will tell you, the minimum wage is a story about supply and demand. In Econ 101, students learn that prices are incentives that influence the actions of buyers and sellers.
At the core, it's pretty simple. The law of demand states that as the price of a good or service increases, consumers will buy less. As the price goes down, consumers will buy more. The law of supply states that as the price of a good or service goes up, producers will supply more. As the price goes down, producers will supply less. The point where supply and demand balance is called the market price.
Unfortunately, many people have difficulty translating these common-sense ideas — ones they experience every day in supermarkets and at gas stations — to the labor market for unskilled workers and how it affects them.
In markets for unskilled labor, demand is created by employers, and when the price of unskilled labor (wages) goes up, employers will buy less — often laying off employees or finding labor-saving substitutes through new technology. When the price of unskilled labor goes down, they hire more employees. Suppliers in unskilled labor markets are the people who wish to work. When wages increase, workers are willing to do more work. When wages go down, workers are less willing to work.
The point where supply and demand for unskilled labor balance is once again the market price. When wages are arbitrarily set above the market price, the result is a surplus, and that surplus is what politicians and the media call unemployment.
The majority of academic research supports this conclusion. An exhaustive review of recent research by David Neuman and William Wascher concluded that 85% of the most credible minimum wage studies provide strong evidence of negative employment effects resulting from minimum wage laws.
Regrettably, many politicians have a vested interest in deceit, and they depend on the economic ignorance of voters to get their way.
Supporters of minimum wage laws have a concentrated interest in doing so. Labor unions, for example, believe their members benefit when wages for unskilled workers are set artificially high. Leaders of labor unions work very hard to convince voters that the laws of supply and demand should be ignored.
Many politicians accept the support of such interest groups even though they almost certainly recognize that the laws of supply and demand cannot be repealed and that their interference with market prices for wages will cause more harm than good.
How can politicians get away with such deceit? Unfortunately, the reduced employment caused by minimum wage laws is nearly invisible. It is spread out over a voiceless and disorganized group of unskilled workers who may wish to work but are priced out of the market. They are in no position to hire lobbyists, organize advertising campaigns, make campaign contributions or stage protests.
But hiring lobbyists and staging protests isn't necessarily the solution. It starts with educating the citizenry and instilling them with a strong economic foundation. Economics Wisconsin offers two-day seminars for opinion leaders — teachers, elected officials, journalists and clergy — and the Stavros Center for Economic Education at Florida State University is offering a new online course for teachers and others called Common Sense: Economics for Life! These and many other like-minded organizations deserve the support of people who support economic literacy.
At the end of the day, it doesn't help anyone if the understanding of the minimum wage and other economic policies is limited to a few academics. If we want to move our country forward, educating our fellow man is the first step.
Mark C. Schug is an economic consultant and professor emeritus at the University of Wisconsin-Milwaukee. Gordon D. Gaster is a financial consultant in Jupiter, Fla.
Link:
http://www.jsonline.com/news/opinion/minimum-wage-hike-understand-economics-b99194614z1-243428321.html
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