AddToAny

Share

Debunking Arguments against a Minimum Wage Increase

Debunking Arguments against a Minimum Wage Increase



Many arguments against an increase in the minimum wage tend to be along the lines of one or more of the following:

  1. “Businesses will lay off workers, hurting the same people that the minimum wage is supposed to help.” I call this argument the Unemployment Argument.
  2. “Businesses will simply pass along the cost increase to their customers in the form of higher prices, and workers won’t be any better off than before due to inflation caused by the minimum wage increase.” I call this argument the Inflation Argument.
  3. “The cost increase will force businesses to cut production, and the economy will tank.” I call this argument the Trickle-down Argument.


  4. Any honest discussion of an increase in the minimum wage will deal with these types of arguments. There are forces at work which justify concern about these issues. At the same time, any honest discussion of an increase in the minimum wage will not begin and end with these types of arguments. There are other forces at work which need to be taken into consideration.


    Each of these arguments could also be called the “Econ 101 argument”. This is because those making such arguments often use language such as “If you knew basic economics, you would know this is true”. Sometimes the language is a little stronger, implying that “I oppose an increase in the minimum wage because I understand economics. If you support an increase in the minimum wage, it proves that you don’t understand basic economics. Therefore, your viewpoint is invalid”. This type of argument is an attempt to eliminate the "other forces at work" from the discussion.


    When somebody uses these kinds of arguments - and justifies their conclusions by invoking the "Econ 101 argument" - you can respond by asking them to read this article. Econ 101 does NOT teach that these things will be the result of a real-world increase in the minimum wage. Those who claim superior knowledge of basic economics by saying these things are true "because it says so in Econ 101" don’t understand basic economics as well as they think they do.


    I'm not going to attempt to show that the concerns raised by these arguments are not part of the equation. My issue here is to show that justifying these concerns with "because it says so in Econ 101" is not a valid argument. Along the way, it should be clear that other, offsetting forces are at work. Even if there is validity to the concerns themselves (more unemployment, higher prices, lower production), due to certain economic forces unleashed by an increase in the minimum wage, there are other forces, not mentioned in the arguments, which tend to neutralize or even completely offset such arguments. Then there is the matter of the historical track record, which doesn't support the conclusions of the "Econ 101 argument".


    First of all, you need to know where these arguments are coming from. What exactly do people mean when they invoke an Econ 101 argument?

    The Econ 101 Argument



    An Econ 101 argument has its basis in a graph such as this one:


    Figure 1



    Figure 1 is a basic supply & demand diagram. It is an example of a visual representation of concepts taught in economics classes. This one is a basic diagram from which more complex concepts and diagrams are based. It plots the relationship between price and quantity in a typical market. The point where the heavy vertical and horizontal lines meet is called the origin. The vertical line labeled $ represents price. The farther you go up the line, away from the origin, the higher the price. The horizontal line labeled Q represents quantity. The farther you go out away from the origin, the higher the quantity.


    Within the heavy lines, in the plot area, are two more lines, labeled S and D. The line labeled S is the supply curve. It is a visual representation of the Law of Supply, which states that as the price increases, the quantity that suppliers are willing and able to supply increases as well; and as the price decreases, the quantity that suppliers are willing and able to supply decreases. In other words, there is a positive relationship between price and the quantity supplied – the quantity changes in the same direction that price changes. Businesses are willing and able to sell more if they can get a higher price. This gives the supply curve an upward slope. For more on supply, the law of supply, and the supply curve as taught in Econ 101, click here.


    The line labeled D is the demand curve. It is a visual representation of the Law of Demand, which states that as the price increases, the quantity that buyers are willing and able to buy decreases; and as the price decreases, the quantity that buyers are willing and able to buy increases. In other words, there is a negative relationship between price and the quantity demanded – the quantity changes in the opposite direction of a price change. Consumers are willing and able to buy more when the price is lower. This gives the demand curve a downward slope. For more on demand, the law of demand, and the demand curve as taught in Econ 101, click here.


    The benefits of free-market economics, the Invisible Hand, and the resulting efficiency gains all stem from the concepts behind the diagram in Figure 1. Other, more complicated graphs in economics classes are extensions of the concepts behind this one. Since the supply curve (S) slopes upward, and the demand curve (D) slopes downward, the efficient market price and quantity will be the price and quantity where these two curves intersect. In Figure 1, the market price is labeled P1, which is the price at which the supply and demand curves intersect, and the market quantity is labeled Q1, which is the quantity at which the supply and demand curves intersect. The point of intersection, labeled E in Figure 1, is the market equilibrium point. It is sometimes referred to as the efficiency point, representing the price and quantity deemed most efficient.


    This quick overview of a supply and demand diagram is necessary for understanding the Econ 101 arguments against increasing the minimum wage. The diagram in Figure 1 is for a generic market. The labor market is also a market in which the same supply and demand concepts apply. The supply curve in the labor market slopes upward. The demand curve in the labor market slopes downward. The equilibrium, or efficiency, point is where these two curves intersect.


    Everything in this diagram is the same in the labor market as it is in a market for widgets. In the labor market, the price is the wage rate. The demand for labor is the quantity of labor (number of workers or hours of work) that employers wish to hire at each wage rate. The supply of labor is the quantity of labor that workers are willing to supply at each wage rate. In this sense, there is a sort-of role reversal – those who are suppliers in the product and service markets are the demanders of labor.


    From here, we can add in the variable of an increase in the minimum wage and see graphically what the Econ 101 arguments are all about.


    Figure 2



    Figure 2 is identical to Figure 1, except that it is specific to a labor market with a minimum wage set above the equilibrium wage. P1 is the prevailing market wage rate, identical to the price labeled “P” in Figure 1. Q1 is the amount of employment in this market if there is no minimum wage set above the prevailing wage. P2 is a minimum wage set above the prevailing wage.


    If the wage rate is changed from P1 to P2, look at what happens to employment. Due to the slopes of the supply and demand curves, this new wage rate intersects the demand curve at a lower quantity of labor (labeled Q2) than the equilibrium quantity of labor (labeled Q1); while at the same time, it intersects the supply curve at a higher quantity of labor (labeled Q3) than the equilibrium quantity of labor (Q1).


    In other words, employers are willing to hire fewer workers at a higher wage rate, but workers are willing to supply more labor at a higher wage rate. So how many people will get work? It doesn’t matter that more people are willing to work if employers are willing to hire fewer workers. You can’t get a job if nobody wants to hire you. The lower quantity will prevail, in this case the quantity that is determined by the demand for labor curve.


    The amount by which Q2 is lower than Q1 represents the number of jobs that will be lost due to an increase in the minimum wage (you can measure this lost labor in terms of hours worked instead of in terms of jobs, but the message of this generic approach is that people will lose wage income one way or another). The difference between Q2 and Q1 is new unemployment created by the increase in the minimum wage. But since more workers are willing to work at the higher wage, the difference between Q1 and Q3 is also new unemployment. Therefore, unemployment increases by the total amount of (Q3 minus Q2), with (Q1 minus Q2) being the number of people laid off due to the minimum wage, and (Q3 minus Q1) being the number of people formerly not in the labor market who are now looking for work due to the higher wage rate. Unemployment increases by a higher rate than the number of people who are laid off, due to the slopes of the supply & demand curves.


    The conclusion reached is that with a minimum wage, fewer people will find work. More people will be unemployed. This only applies if the minimum wage is set above the prevailing market wage, because a minimum wage is a price floor. If a minimum wage is already in effect, and the analysis is about raising it to a higher wage rate, then the higher minimum wage will increase both the number of jobs lost and the unemployment rate.


    This is the essence of the Unemployment Argument against an increase in the minimum wage. When someone tells you that an increase in the minimum wage will increase unemployment and hurt those it is supposed to help, because “everybody who understands basic economics knows this”, go ahead and ask them to explain what they mean. Perhaps they can’t explain it, because they don’t understand it themselves and they are only repeating what they have heard. But if they do try to explain it, then their explanation will be a form of the explanation that I just gave here.


    //


    What about the other Econ 101 arguments – the Inflation argument and the Trickle-down argument?



    These arguments involve more than the labor market. They involve production and the sale of goods and services produced in the economy. They involve the product markets – the market for widgets, so to speak.


    You have to understand that the demand for labor is a derived demand. People and businesses don’t hire and pay workers because they are in the business of paying workers. They are in the business of earning a profit. Producing and selling widgets is the method they use for earning a profit. But the process of producing and selling widgets involves labor, so these businesses need to hire labor in order to realize their objectives. If they could find a cheaper method for getting the same results, one that would increase profits, they would do so. The demand for labor is derived from the demand for widgets. So we need to look at the market for widgets.


    Figure 3



    Figure 3 is identical to Figure 1 above. The only difference is that Figure 1 was used as a reference for an analysis of the labor market, and Figure 3 is for a product or service market – the market for widgets in this generic explanation. The same supply & demand properties apply to all kinds of markets, so the same generic graph also applies to all markets. In this example, P1 is the free market price of widgets, and Q1 is the quantity of widgets that will be produced and sold at that price. P1 is considered to be the efficiency price, and Q1 is considered to be the efficiency quantity. This graph shows the widget market in equilibrium.


    What happens to the market for widgets when an increase in the minimum wage causes the cost of producing widgets to go up?


    One of the factors of supply is the price of resources, and labor is a resource in the market for widgets. When the price of labor increases, the supply of widgets will decrease regardless of the demand for widgets. This means that the widget market moves from the equilibrium situation shown in Figure 3, to a new equilibrium situation as shown by Figure 4.


    Figure 4



    D, S1, P1 and Q1 in Figure 4 represent the same equilibrium situation as D, S, P1, and Q1 in Figure 3. This is the equilibrium in the market for widgets before an increase in the minimum wage goes into effect. But when you introduce an increase in the minimum wage, which involves a decrease in the supply of widgets as explained above, then the supply curve shifts from S1 to S2. P2 becomes the new equilibrium price of widgets, and Q2 becomes the new equilibrium quantity of widgets produced. You will note that P2 is higher than P1 and that Q2 is lower than Q1. In other words, an increase in the minimum wage has caused the price of widgets to increase (the Inflation Argument against an increase in the minimum wage), while at the same time it has caused the production of widgets to decrease (the Trickle-down Argument against an increase in the minimum wage).


    These are the Econ 101 arguments against an increase in the minimum wage. Again, when someone mentions Econ 101 as a reason for opposing an increase in the minimum wage, you should ask them what they mean. Ask for a detailed explanation. If they can’t tell you, it’s probably because they don’t know and they are simply repeating what they have heard. But if they do give you an explanation, and do so in a way that sounds like they know what they are talking about, then they will say something along the lines of my explanation above.


    You should note that this explanation does involve a higher price in the generic widget market, and therefore higher prices in all markets affected by an increase in the minimum wage. But it does NOT support the claim that “businesses will simply raise their prices to cover the cost increase”. The price does go up, but not by the full amount of the increase in cost. If you look at Figure 4, you will see that the difference between S1 and S2 is larger than the difference between P1 and P2. This is due to basic supply & demand principles involving the downward slope of the demand curve. A price increase is definitely involved, just not for the full amount of the cost increase.


    Other than that relatively minor detail, the Econ 101 Argument involves conclusions based on the above analysis of concepts taught in a basic economics course.


    If you understand everything that I have said so far, but at the same time you have never taken an actual economics course, then congratulations! You now have a basic working knowledge of some of the most important principles of microeconomics. Not nearly all of the important principles that you would find in an Econ 101 course, but at least the ones that are being used to invoke an Econ 101 argument against an increase in the minimum wage.

    Debunking the Econ 101 Argument



    Unfortunately for those who claim superior knowledge of basic economics when they invoke an Econ 101 argument against an increase in the minimum wage, their conclusions have two fatal flaws.

    1. The historical record does not support their claims
    2. Their conclusions are based on a faulty understanding of the concepts that they claim to understand better than anybody who supports an increase in the minimum wage


    The Historical Record



    An increase in the minimum wage isn’t a theoretical concept. It is something that has been done many times before, and there is a fairly extensive historical record of the results. Why would you listen to someone who tells you what will happen, according to some graphs in an economics course, when you can go to the actual record and see what has happened in the real world? After all, we are talking about real-world policies here. We are concerned about real-world results.


    Since the introduction of a minimum wage in the United States, the minimum wage has been increased 21 times – spread out over the years between 1939 and 2009. The minimum wage increases have come at varying stages in the business cycle. It has been increased during recessions, it has been increased when the economy was in the process of recovering from recessions, it has been increased before recessions, and it has been increased at times far removed from recessions. With this kind of a record, any claims that “this will happen if you increase the minimum wage” would show up as strong statistical trends. That is, if the claims were true. “Other things going on in the economy caused those results?” When the sample includes such a wide array of circumstances, over many years, under different political philosophies, and then the results can be blamed on “other things” but never the Econ 101 claim being made, then what good is that claim for the real world?


    What are the actual results of these 21 historical incidents of a minimum wage increase in the United States?


    First of all, we should define what we are looking for. Are we going to look at the annual numbers for the same fiscal or calendar year that the minimum wage has increased, regardless of what part of the year the increase has gone into effect? Are we going to look at the annual numbers for the year following the minimum wage increase, in order to allow for a time lapse for the results to work their way through the economy? Neither one of these options will show the kind of statistical correlation that would be present if the Econ 101 arguments were true. But here are the numbers for the combination of the same year’s numbers and the following year’s numbers:

    1. Number of times that the minimum wage has been increased, starting in 1939: 21
    2. Number of times that production (as measured by real GDP) has increased: 17
    3. Number of times that production (as measured by real GDP) has decreased: 4
    4. Number of times that the number of jobs in the economy has increased: 17
    5. Number of times that the number of jobs in the economy has decreased: 3

    (The jobs numbers add up to 20 instances instead of 21, because the data for 1939 is not available)


    These numbers simply do not support a claim that an increase in the minimum wage will cost jobs or production.


    Out of the 21 times that the minimum wage has been increased:

    1. 10 occurred when the economy was already experiencing recessionary forces
    2. 3 occurred shortly after the economy had recovered from a recession
    3. 2 occurred shortly before the start of a recession
    4. 6 occurred at times unrelated to any recession


    5. Despite this historical record, under various economic conditions, the data does not support claims that an increase in the minimum wage will cause job loss. The data does not support claims that an increase in the minimum wage will cause loss of economic production.


      Does the data prove that an increase in the minimum wage will create more jobs and more economic production, since both tend to increase following an increase in the minimum wage? No, the data doesn't prove any such cause/effect relationship. There are other forces at work. Jobs and production both tend to increase in non-recessionary times, and fall during recessions. But the historical data does disprove claims that the opposite kind of cause/effect relationship WILL happen.


      What about the argument that an increase in the minimum wage will cause inflation, so that workers won’t be any better off than before?


      First of all, you have to be careful to understand exactly what inflation is, what the consequences are, and what is considered acceptable and unacceptable. That is the subject of a completely different post. The bottom line is that deflation (negative inflation, which we have experienced many times in the past) is bad for the economy; zero inflation and very low rates of inflation (such as we have now) have some of the same negative effects on the economy that deflation has, and can lead to deflation; very high rates of inflation are bad for the economy (hyperinflation is something that we have never approached despite many predictions over the years, but we have had double-digit inflation on occasion, the last time being 1981); but moderate rates of inflation are good for economic growth. Inflation rates around 3% per year are considered to be consistent with healthy economic growth; some economists would say anything between 3% and 5% is healthy.


      During the time frame that a minimum wage has existed in the United States (1938 to present), there have been a total of 17 years with inflation rates above 5% (the last one was in 1990). Of these, 6 have been instances of double-digit inflation (the last one was in 1981, and all of them can be associated with either WWII or the stagflation era of the 1970s). Of the 17 times that inflation has exceeded 5%, 8 of them coincided with an increase in the minimum wage. Does this mean that an increase in the minimum wage causes inflation which leaves workers no better off than before?


      Figure 5



      Figure 5 is a graph of the real minimum wage in the United States over time. This is the minimum wage adjusted for inflation. The graph shows that when the minimum wage increases, the purchasing power of a minimum wage worker increases. When the minimum wage is not increased, the purchasing power of a minimum wage worker declines over time due to normal inflation.


      The real minimum wage peaked in 1968 ($10.77 per hour in 2013 dollars). It is widely acknowledged that during the time frame when the real minimum wage was higher than today’s minimum wage, the average full-time worker earned a livable wage, at least compared to today’s situation. Historically, increasing the minimum wage has left the average worker "better off". These same workers lose purchasing power due to inflation when the minimum wage is not increased accordingly.

      Faulty Conclusions from Teaching of Basic Economics



      The historical record does not support Econ 101 claims against an increase in the minimum wage. There should be no reason to resort to citing Econ 101 teaching as a reason to oppose an increase in the minimum wage. The conclusions of the Econ 101 arguments have been shown to not hold true in the real world, so they are not valid. But why aren’t they valid?


      The answer lies within the Econ 101 teaching itself. The analysis of Econ 101 teaching that leads to a conclusion that “If the minimum wage is increased, this (the Unemployment Argument, the Inflation Argument, and/or the Trickle-down Argument) will happen” is not a logical argument. It ignores relevant concepts taught in a basic economics class.


      The Econ 101 arguments against an increase in the minimum wage are based on conclusions from Figure 2 and Figure 4 above. However, a careful analysis of the diagrams in Figures 2 and 4 does NOT lead to a conclusion that these negative results will occur in the real world if the minimum wage is increased. What these diagrams show is that under circumstances defined by necessary assumptions, these results will occur. Such circumstances are not the same thing as the real world.


      All economic models, including the basic supply & demand model in Figure 1 above, are based on a host of assumptions. Each time a model is expanded in order to add new variables, and each time a new model is introduced that is based on a simpler model, new assumptions are added. These assumptions are necessary for the models to be logically valid. But the same assumptions take the model out of the realm of the real world and place it into the laboratory-like realm of theory.


      For example, Figure 6 here is the same as Figure 2 above:


      Figure 6



      The Econ 101 Argument uses this model to conclude that “if the minimum wage is increased to P2, then unemployment in the amount of Q3 minus Q2 will result”. The logical form of this argument is:


      If A, then X


      The problem is that this is a faulty conclusion of this model. This is a model, not the real world. The model only works under a specific set of assumptions that you cannot see in the diagram. Each of these assumptions is a departure from the real world, and any valid conclusions must take the assumptions into proper consideration. Each assumption becomes an additional premise to the logical form. Instead of:


      If A, then X


      The logical form of conclusions must be:


      If A, and if B, and if C, and if … N, then X


      With:


      X = the conclusion that is drawn, such as a specific increase in unemployment
      A = the variable under consideration, such as an increase in the minimum wage
      And


      B, C, … and N = all of the assumptions behind the model


      The conclusions do not logically follow, unless the assumptions are included. The assumptions in turn take the model away from the realm of the real world.


      //

      Assumptions



      The assumptions behind these models can be explicit, meaning that they might have been expressly stated as assumptions within the teaching of the models. I know that when I was a student, my professors always gave me a list of assumptions when introducing a new model. On the other hand, many of the assumptions are likely to be implicit. They have not been expressly stated as assumptions, but must be inferred from the known information. Often, implicit assumptions relate to concepts that students haven’t been introduced to yet. That’s one of the problems with the method that schools are teaching economics. Basic economics involves many different concepts which are interrelated, but students are introduced to them one at a time. Once new ones are introduced, there simply isn’t enough time in a given course to go back through all of the previous models that the new concept applies to.


      Definitions of terms involved in models are also assumptions. For example, in the supply & demand analysis used for this essay, the term “market” is important for the analysis, but so is the fact that the term is defined in a very broad, generic sense. The labor market in the analysis assumes one generic labor market which disregards different wage levels, different skill levels, different skill types, geographic limitations, and differences in the specific jobs that individuals are qualified for and interested in, among many other omissions. Inclusion of these differences would complicate the analysis, but would look more like the real world.


      Supply & demand each have their own set of assumptions, which become assumptions for this analysis. The concept of elasticity, as it applies on multiple levels, is extremely important for a real-world analysis, yet ignoring elasticity is one of the assumptions being used. Supply & demand curves are included in their most generic forms, yet their properties, including slopes, are extremely important. In any given real-world labor market - however that is defined - how many more individuals would choose to enter the labor market with a given increase in the wage rate, and how much (if any) would this increase in pay induce those already in the labor market to increase hours worked and/or work harder and be more productive? There are implicit assumptions involved with all of this.


      What about the part of the analysis in which supply is decreased in the product market due to an increase in the wage rate? The market equilibrium quantity and price in the product market involves many different factors. How much does a change in labor costs factor into this when there are so many other factors involved? Remember, the product market has its own equilibrium based on both the demand curve and the supply curve, and each of these curves is based on multiple factors.


      One assumption in the analysis of an increase in the minimum wage is the assumption of perfect competition in all markets involved. I would guess that most students aren’t even told that this is an assumption, but the analysis doesn’t work without it. The direct and automatic connection between labor cost and product supply requires this assumption. It’s important to note is that perfect competition doesn’t even exist in the real world, and it never has. In economics classes, perfect competition is introduced as the theoretical efficiency ideal to be compared to other market structures. Each type of market is categorized into a named market structure, using another set of assumptions. In terms of properties, every market at the local level is most closely associated with either oligopoly or monopoly, yet the analysis of the minimum wage assumes the properties associated with perfect competition. The conclusions to be drawn are completely different depending on the market structure, including the relationship between supply and labor cost.


      One very important assumption is that this analysis is strictly a microeconomic analysis, with the focus entirely on the internal mechanics at the market level. Any macroeconomic effects of the microeconomic changes are specifically ignored. This is the ceteris paribus assumption. If one business increases the amount of wages it pays to its employees, then it will have a cost increase with little effect on revenue. But if the wage rate is increased across the entire economy, which it would be in the case of a minimum wage increase, then the general public will have more money to spend in retail establishments, then demand would increase, which would give businesses a motivation to increase production and hire more employees. This concept includes the concept of different marginal propensities to consume (MPC) for different classifications of people, and different multiplier effects for different types of economic activities.


      In terms of the type of diagrams used in the discussion above about Econ 101 arguments, the macroeconomic effects of an increase in the minimum wage in the labor market would look like this:


      Figure 7



      In figure 7, a change in the wage rate from P1 to P2 due to an increase in the minimum wage would provide consumers with additional money to spend in the economy. This will increase demand in the product markets, which would influence businesses to increase production, which would create more demand in the labor market. The additional demand in the labor market will increase, not decrease, employment. This is the opposite effect as in Figure 2 above.


      I saved what is possibly the most important assumption for last. Take another look at Figure 1:


      Figure 1



      Left virtually unmentioned so far in this analysis is the big E where the supply and demand curves intersect. The assumption for this analysis is that this is a point of equilibrium in the given market. This assumption means that this point is the point where the market is most efficient. It implies that there are no market failures involved, the Invisible Hand is operating properly, nobody is being exploited, every choice to enter or not enter the market is voluntary, no asymmetrical information exists, and each side in every transaction has equal market power. In other words, everything is hunky-dory in this market. Since markets are interrelated, everything is hunky-dory in all related markets.


      This assumption that E = all of the above characteristics is vital to the conclusions in the Econ 101 arguments that an increase in the minimum wage will have specific negative effects on individuals and on the economy. The entire set of conclusions is invalid if this assumption is not true.


      In reality, point E is none of the above. This point is merely the beginning point, the “before” in a “before and after” analysis of a policy change.


      Take a look at the labor market today. Take a look at the history of the labor market. Do you honestly believe that each side has equal market power? If you believe in free market theory, then you have to know that in free markets, labor is supposed to be paid according to productivity. Yet there has been a divergence of wages and productivity ever since policy changes have overwhelmingly favored employers at the expense of employees. Wages haven’t gone up, in real terms, for over 30 years now, yet productivity has continued along the same upward path. Labor is receiving a smaller share than it used to; people are working full time for less-than-living wages. Employed people are forced to apply for public assistance because their employers are not paying them enough to survive. There are many long-term unemployed people, and many of those who do have jobs are working for poverty wages. These trends cannot be sustained forever. There are economic ramifications and there are political ramifications.


      Clearly, this is a case of market failure. The minimum wage is a policy which deals with some of the symptoms of this type of market failure. The subject of market failure is also covered in an Econ 101 course, but is not mentioned by those who invoke an Econ 101 argument against an increase in the minimum wage. Of course, politicians could get together, agree on the source of this type of market failure, and undo the policies which have created it. Since that isn't likely to happen soon, a correction for market failure - such as an increase in the minimum wage - is another option. What does Econ 101 say about correcting for this type of market failure?


      Take a look at Figure 8 below.


      Figure 8



      Suppose you could convince policymakers that the labor market is operating at point F, but due to market failure, the economy would work better if it were operating at point E. Point E has a higher wage rate for workers, and there are more people with jobs. How do you go from point F to point E? According to Econ 101, in order to correct for market failure by increasing both price and quantity, you need to increase demand.


      A diagram of a correction, with the appropriate supply & demand curves, would look like this:


      Figure 9



      This would be an Econ 101 correction for market failure. It would move the market from a position of failure (point F) to a position of market equilibrium (point E). And how do we do that?


      We’ve already been there in this analysis. Look above. Figure 9, the correction for market failure, is identical to Figure 7 above, which shows the effects - including macroeconomic effects - of an increase in the minimum wage!

      We have just shown that an increase in the minimum wage is an Econ 101 correction for market failure.



      This analysis is consistent with the historical record. It is consistent with concepts taught in Econ 101 class, including the concepts ignored by those who invoke the Econ 101 arguments to argue for a completely different conclusion. The main difference, in terms of the types of diagrams that the Econ 101 arguments are based, is the difference between calling the current situation optimal or not optimal.


      The Econ 101 arguments against an increase in the minimum wage require the current situation to be considered optimal.


      A version of this essay is included as a chapter in the book Common Misconceptions of Economic Policy by Jerry Wyant. You can purchase this book in paperback form from Amazon and other online book distributors. The list price is $12.99 (only $9.99 using discount code TA9GTK7E when ordering, depending on the distribution channel). Or if you prefer, you can download a digital version on your device (Kindle, Nook, etc.) for $4.99.

      Paperback version from Amazon
      Kindle version from Amazon
      All eBook formats from Smashwords

Author: 
Jerry Wyant
Date: 
2014-10-07
Share