Thursday, November 4, 2010

Unemployment and the Minimum Wage

Economic theory teaches that in the best of times, if the state establishes a minimum wage above the market wage, unemployment will result. This is because at the artificially high wage, the quantity of labor workers are willing to supply is greater than the quantity of labor demanded by entrepreneurs. In a free market, the more eager workers--those willing to work for lower wages--would bid down the wage until everyone who wants to work at the prevailing wage can work. A minimum wage fixed above the market wage prevents this adjustment from happening and therefore generates unemployment.

The effect of a minimum wage is even more pronounced during economic recessions. During economic downturns labor demand in many industry wanes, making it even more likely that a government mandated wage floor will be above the market rate. The government most recently raised the minimum wage at the worst possible time. I said this very thing last July. Not surprisingly, a study sponsored by the Employment Policies Institute documents that the minimum wage increase had a strongly negative influence on employment in those labor markets most closely effected by the minimum wage--those for unskilled labor and teenagers.  The entire study, authored by economists William E. Even and David A. MacPherson can be read here,

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