Now a few weeks past its inauguration, let’s examine a substantial market intervention promised by the Biden-Harris administration: An increase in the federal minimum wage from $7.25 an hour to $15.00 an hour by June 2025.
What is a minimum wage?
A government regulation that makes it illegal to hire labor services at a wage lower than a specified level is called a minimum wage. Firms are free to pay a wage rate that exceeds the minimum wage but may not pay less than it.
What is the minimum wage in the U.S.?
The federal minimum wage in the U.S. is $7.25 an hour, but most states set their own minimum wages at a level higher than the federal minimum.
The current level of the federal minimum wage was set in 2009, raised from the previous minimum of $6.55 an hour. But the federal minimum wage is not tied to inflation and its purchasing power falls over time as prices rise.
What are the aims of a minimum wage?
The aims of a minimum wage are to boost the incomes of low-wage earners and to reduce poverty. According to a study by Congressional Budget Office, the Biden-Harris minimum wage phase-in would increase the wages of 17 million low-wage earners in the U.S., and would lift 900,000 people out of poverty.
Is the minimum wage efficient?
The demand for labor is the marginal benefit of labor to the firms that hire it. Firms benefit because the labor they hire produces the goods and services they sell. Firms are willing to pay a wage rate equal to the benefit they receive from an additional hour of labor. The marginal benefit minus the wage rate is a surplus for the firms.
The supply of labor is the marginal cost of working. To work, people must forgo leisure and other activities they value. The wage rate minus the marginal cost of working is a surplus for the workers.
An efficient allocation of labor occurs when the marginal benefit to firms equals the marginal cost experienced by workers. Without a minimum wage, labor market forces determine the equilibrium wage rate and the quantity of labor hired, and total surplus—the sum of firms’ surplus and workers’ surplus—is maximized. With a minimum wage, the marginal benefit to firms exceeds the marginal cost experienced by workers. A deadweight loss arises at the minimum wage and creates unemployment.
The study by the Congressional Budget Office predicts that the Biden-Harris minimum wage hike will put 1.4 million U.S. workers out of work.
Is the minimum wage fair?
The minimum wage blocks voluntary exchange. Firms are willing to hire more labor and workers are willing to work more, but they are not permitted by the minimum wage law to do so.
The people who retain their jobs or can find new jobs after a minimum wage is introduced benefit, but people who are unemployed end up worse off. Further unfairness can occur when the reduced number of labor hours are allocated and firms select which workers to lay off (e.g. labor market discrimination).
Does the minimum wage have other adverse effects?
Finding a good job takes time, and this time is called search activity. With a minimum wage, more people are looking for jobs than the number of jobs available at the wage rate. Frustrated unemployed people exhaust considerable search activity looking for hard-to-find jobs.
With more people looking for work than the number of jobs available, some firms and workers might agree to do business at an illegal wage rate below the minimum wage in a black market—an illegal market in which the minimum wage exceeds the equilibrium wage. Workers in black markets are susceptible to dangerous working conditions because jobs in black markets are entirely unregulated.
Why do we have a minimum wage?
We’ve seen that the current administration’s minimum wage hike will likely create unemployment, will not be robust to inflation, will increase tiresome job search activity, will create unregulated black-market labor, and will be neither efficient nor fair. So why have it?
Supporters of the minimum wage believe that the elasticities of demand and supply in the labor market are low, so not much unemployment results from raising the minimum wage. Labor unions support the minimum wage because it puts upward pressure on all wage rates, including those of union workers. Nonunion labor is a substitute for union labor, so when the minimum wage rises, the demand for union labor increases.
What do economists think of the minimum wage?
The mainstream view among economists is that raising the minimum wage increases unemployment, especially among teens. A substantial minority of economists, however, thinks that increasing the minimum wage has no effect or even has a positive effect on employment.
The Initiative on Global Markets polled 43 top economists in the U.S. on how much they agreed with the following statement: “A federal minimum wage of $15 per hour would lower employment for low-wage workers in many states.” Figure 2 highlights the responses of the 39 economists who provided an opinion.
On average, economists think that the economic policy proposed by the current administration will lower employment among low-wage workers.
Let’s look at a labor market with a minimum wage.
Now take a short quiz to check that you understand what you just read.
Multiple Choice Test: The Biden-Harris Minimum Wage Hike