Tuesday, November 5, 2013

Learning economics through pictures: The minimum wage

Sometimes a picture is worth ... well, you know the cliche.  Over the next couple of weeks, I intend to post pictures that provide an enormous amount of information about the economy and economic policies.  This is the first post of the series.

Here's a picture of unemployment rates and how they vary by age groups:

This picture tells a story of the impact of minimum wages.  Many argue that minimum wages are good for society.  Some will make claims that a working family can't survive on the minimum wage, while others argue that a higher minimum wage is inefficient, but that its better than other forms of government aid.  There is subset of advocates who take their advocacy of minimum wages to another level, and will try to argue that minimum wages have little to no effect on unemployment.

This, of course, is complete nonsense.  Economic theory predicts that the minimum wage will cause unemployment among the affected groups - those whose human capital is so low the wage that they're value to employers is close to the minimum wage.  If you don't want to believe the theory, there's a simple way to test whether the minimum wage matters.  We simply need to look at the unemployment rate across age groups.  If the unemployment rate is approximately the same, then we would be forced to admit that the minimum wage likely doesn't matter.  If it's different, however, then we'd look to the minimum wage as the likely culprit.

The picture provides dramatic evidence of the minimum wage's damaging impact.  Not only is the 16-24 year old unemployment always higher, but look how much larger the unemployment rate went up for teenagers during the Great Recession.  The unemployment rate for other demographic groups went up by about 5%, but for teenagers it was by 10%.  That didn't happen during the 2001 recession, so why now?  

The US raised the minimum wage to $6.55 in 2008 and $7.25 in 2009.  Terrible timing, and the results were predictable and unfortunate.


Picture from tipstrategies.com

Parts 2 and 3 coming soon.

2 comments:

  1. Hi Matt.

    This is quite interesting. Thanks for posting it!

    Dirk

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  2. Christopher WarburtonDecember 22, 2013 at 7:12 AM

    Minimum wage is part of variable cost, which is also a component of total cost. Of course, profit is contingent on revenue and cost. While data provide very valuable insights into what is going on, we must never forget that not all information could be captured by available data. There is the elusive underground economy, where people continue to work for starvation wages, and rigidities that prevent factor movements and information diffusion. There is also the concept of rational self interest which captures the willingness of employers to employ people as long as people are willing to accept prevailing wages when the marginal product of labor is expected to be positive. In effect, employers will always demand labor when it is profitable to do so and job seekers will react accordingly. Implicitly, this means that cost of production must be evaluated against productivity and revenue. Beyond the agricultural and service sectors, technological innovation and global economic integration have made the concept of the minimum wage more convoluted than it might seem. As companies relocate production, employment and wages are also affected at all levels as a result of external costs. We still need to keep a closer eye on rigidities, structural changes, and the effects of such changes on employment and wages as time progresses. The pictures definitely provide valuable insights, so please keep them coming.

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