﻿Welcome to WCS Money Tutorials. Today’s topic explains the economics behind why
a higher minimum wage can improve everyone’s life and increase the total economic wealth of society.
Since most people earn the money they need to live through work, governments the world over
have established minimum wage laws, requiring businesses and other organizations to pay a
minimum wage so that workers can at least live. There is much controversy around the minimum wage.
Business owners want to keep the minimum wage low or even eliminate it,
since that would lower their labor costs. They argue that a minimum wage increases unemployment.
However, many workers, especially low-income workers, want it to be higher so that they can
earn a livable wage. Wages that are too low will dissuade many people from even seeking employment.
The last minimum wage increase was in 2009! Many states also have minimum wage laws.
In 2021, federal, state, and local governments in the United States are trying to raise the
minimum wage to $15 per hour.
The first minimum wage law in the United States was first imposed by Massachusetts in 1912.
The federal government first imposed a minimum wage law in 1938, during the Great Depression,
under the Fair Labor Standards Act (FLSA). The peak purchasing power of the minimum
wage occurred in 1968, when it was $1.60 per hour.
The current proposal for the federal minimum wage is to increase it incrementally to $15 an hour
through 2025, then adjust it according to inflation thereafter.
There are some disadvantages to a minimum wage. Business owners have long opposed minimum wage
laws because it increases the cost of a major input for the production of goods and services.
The main disadvantage of a higher minimum wage, it is often argued, is that it will
increase inflation, which may increase other costs affected by inflation, such as long-term
healthcare and the cost of Social Security. However, this inflationary effect is
mitigated by the increase in labor productivity from improving technology.
A higher minimum wage would increase tax revenue, reduce the need for government social spending,
reduce bankruptcies, reduce the cost of government student loans, increase the labor participation
rate, which would increase overall economic wealth, and stimulate the economy through
increased spending by low-income workers. The main benefit is of a minimum wage
is that it is a more livable wage! The usual argument against the minimum
wage considers only the microeconomic perspective of the law of supply and demand for an employer.
According to microeconomics, the equilibrium price is set when supply equals demand.
If the price is set less than or equal to the equilibrium price,
then the minimum price has no effect on supply.
So if the minimum wage is less than the market wage, then it will have no effect on unemployment.
If the price is set above the equilibrium price, then there will be a surplus. If the
minimum wage is set above the equilibrium price for labor, then there will be more unemployment.
Economic textbooks show that the quantity of labor not employed
is the quantity below the minimum wage, as shown in this diagram.
However, this is not an accurate representation because it assumes that the market wage is 0.
The unemployment that would result from setting the minimum wage above the market wage equals the
difference between employment at the minimum wage minus employment at the market wage.
If the market wage is higher than the minimum wage, then no unemployment will result
from the minimum wage. Note, however, that this does not mean that there would not be
any unemployment, just that the unemployment would not result from setting a minimum wage.
The marginal propensity to consume is the proportion of additional
income that a person receives that is spent rather than saved or invested.
So if a poor person receives $100 of additional income,
they will spend the $100, because they need it. If a rich person receives $100 of additional
income, they may spend a couple of bucks, but they will save or invest most, if not all of it.
The marginal propensity to consume is highest for the poor.
This graph plots disposable income against consumption. Note as disposable income increases,
the curve becomes flatter, meaning that wealthier people spend less of any increase in their income.
Note that the graph does not start at 0 for consumption, since everyone
must consume at least something just to live. Increasing the disposable income for the poor…
… Increases their consumption by the same amount, since they do not have
much of what they want or need, so they spend all of their additional income.
But for wealthier people, even a large increase in disposable income…
… Increases their consumption by only a small amount, since wealthier people have most of
what they want or need. Instead, the wealthy invest or save more of their additional income.
A minimum wage may actually increase employment! Why?
The business demand for labor depends not only on its price,
but also on the customer demand for the business’s products and services.
Since poor people will spend all of their increased income, increasing the
minimum wage will increase aggregate demand. Businesses experiencing an increased demand
for their products will also have an increased demand for labor, so they will be willing to
pay a higher price for labor, so businesses will hire more people even at a higher cost.
Furthermore, more people will work. A higher minimum wage will increase the
labor participation rate, which increases the overall wealth created by any economy.
More than 98% of the people earn more than minimum wage, so a higher minimum
wage will not increase most prices. Furthermore, automation will continue to
lower prices or mitigate price increases. Even the fast-food industry is becoming highly automated.
Wages are increasing as the world emerges from the Covid-19 pandemic,
so now’s the time to set the minimum wage higher, to maintain a higher aggregate demand,
and so that the country does not lapse into exploiting cheap labor later. Then,
the lowest paid workers will be able to afford the goods and services they help provide.
In any case, allowing the rich to pay low wages to their workers so that they could be richer
seems pretty much like socialism for the rich! Doesn't it?
To summarize, better-paid workers will work harder, more productively.
More payroll taxes will increase funding for Social Security and Medicare.
People will need less government aid. More people will work, increasing the
overall economic wealth. Technology will lower the
percentage of the cost of labor of products and services, thus mitigating inflation.
Businesses will sell more goods and services, and governments will collect more tax revenue.
Increasing the minimum wage will increase aggregate demand,
which will more than offset any negative microeconomic effect of higher wages.
Thank you very much for your time. If you liked my video, please SUBSCRIBE!
I would appreciate any suggestions, so please leave them in the comments below.
Check out my website at https://thismatter.com for more than 850 in-depth fundamental tutorials
on personal finance, investments, and economics. Check out my books on money at
https://williamspaulding.com. Thank you.