The Economics Battle of Minimum Wage

Updated: May 28

Because Google Adsense deemed this website to have too little content for ads, I'll be posting my top 25 undergraduate papers. This was a paper from the labour economics class. I got to do a deep dive on the concept of minimum wage. Is the labour market competitive, and hence neoclassical models of supply and demand hold? Or are they useless for matters pertaining to the labour market? Economists just love fighting about these sorts of things.




Dalhousie University

ECON 3315

November 22nd, 2020



The minimum wage is an economic concept of which economists have been arguing about since its inception. Some argue the negative impacts far outweigh any positive benefit. While others claim the fears of increased minimum wages are unfounded. This essay will examine the foundation of the critiques of the minimum wage, the problems with the model behind the foundation, the empirical evidence of minimum wage increases in Canada and why those who are against the minimum wage increases must begin to analyze more than a few economic indicators.

The neoclassical model of supply and demand not only tells us what will happen to the prices of goods and services when supply or demand modify, but also tells gives us policy implications in the context of the model. The desired point on the model is the intersection of the supply and demand curves, the equilibrium in the market. If the item in question is labour, the desired point is the point where the supply curve intersects with the demand curve. A minimum wage on the graph acts as a straight horizontal line on the price axis so the minimum wage acts as a price floor. As can be seen by the model, if the price floor that is instituted is higher than the market equilibrium, the equilibrium will not be able to be reached. This causes an excess of people willing to work and causes firms to desire fewer workers.(1) And so, this is why those who take their policy cues solely from neoclassical models of supply and demand will generally not be in favour of a minimum wage.

The problem with taking cues from a model as simplified as the basic neoclassical model of supply and demand is that it is not an accurate representation of a modern real world labour economy. The model assumes that the market is in perfect competition. It is not only arguable that labour markets anywhere on earth today cannot be considered in perfect competition for a variety of reasons. But it is also possible to argue that a perfectly competitive labour market is a logical impossibility due to the assumption of zero transaction costs preventing the existence of multi-person firms. And thus, with positive transaction costs, it could be argued that in reality, wage rates are always either administered or bargained for.(2) That is without even mentioning the other potentially fatal neoclassical assumptions of human behaviour such as rational choice theory and that humans act independently on full and relevant information.

The issues with the neoclassical models of labour are exactly why there exists significant amounts of empirical evidence demonstrating that rises in the minimum wage do not have much of any negative impact on unemployment in the region. There may be some firms that are not profitable enough for an increase in the minimum wage to be affordable. However, there is an ethical dilemma in that if a firm is not profitable enough to pay their employees the minimum wage, perhaps that firm should not exist. Regardless, the percentage of firms in Canada which constitute that characteristic must be small considering the low impact recent minimum wage increases in Alberta have had on unemployment.(3)

The other economic angle in the debate over the minimum wage is a cost-benefit analysis. Even if we accept that there is going to be an increased level of unemployment gathered from a raise in the minimum wage, unemployment is not the only economic indicator that matters. The reductions in poverty that may arise from that increase in the minimum wage are another factor. If the rise in minimum wage leads to a decrease in resources devoted to welfare and food stamps, that is another factor to consider. Economists must also not forget to put a value on factors such as health impacts from the reductions in poverty. And so, given that unemployment is one of the only potential downside of a rise in the minimum wage (inflation is a negative factor as well), the effects of unemployment must be compared to the numerous positive effects to determine the right course of action. The recent minimum wage increase in Ontario did not lead to higher unemployment and did not present significant changes of inflation.(4)

The minimum wage will continue to be a very contentious issue moving forward as firms have obvious incentives to oppose increases in the minimum wage at every turn, they mean less profits for the firms. And economists who turn to neoclassical models of supply and labour for modern day policy proposals will most likely also continue to oppose the minimum wage as a concept and its increases due to it preventing an equilibrium of supply and demand of labour from being achieved. However, the neoclassical model of supply and demand of labour has many holes and objectively does not represent any modern day labour economy. The empirical evidence in Canada surrounding recent increases in the minimum wage also do not suggest that they present significant rises in unemployment or inflation. And even if there were a significant increase in unemployment and inflation, those factors must be compared with the increased utility from those who make the least in our economy now making a little more. Not to mention their increased health benefits and less resources that may need to be devoted to food stamps and welfare. Ethics also must play a role in the cost-benefit dialogue. If an individual works full time providing their labour to a firm, should that firm ever be allowed to pay them less than a livable wage?




Figure 1: Neoclassical model of labour supply and demand

Source: econ101help.com




Bibliography


Econ101help. (2017, May 07). Show in a supply and demand diagram how minimum wage can increase unemployment. Retrieved November 22, 2020, from https://econ101help.com/show-in-a-supply-and-demand-diagram-how-minimum-wage-can-increase-unemployment/


Bruce E. Kaufman, The impossibility of a perfectly competitive labour market, Cambridge Journal of Economics, Volume 31, Issue 5, September 2007, Pages 775–787, https://doi.org/10.1093/cje/bem001


Hussey, I. (2018, January 06). Alberta hasn't suffered for raising the minimum wage. Retrieved November 22, 2020, from https://www.theglobeandmail.com/opinion/alberta-hasnt-suffered-for-raising-the-minimum-wage/article37517324/


Crawley, M. (2018, October 25). Minimum wage hike, workplace reforms killed jobs, Doug Ford says. Here are the facts | CBC News. Retrieved November 22, 2020, from https://www.cbc.ca/news/canada/toronto/ontario-minimum-wage-freeze-employment-law-analysis-1.4877043




1 - See figure 1.

2 - Bruce E. Kaufman, The impossibility of a perfectly competitive labour market, Cambridge Journal of Economics, 2007.

3 - Hussey, I. (2018, January 06). Alberta hasn't suffered for raising the minimum wage.

4 - Crawley, M. (2018, October 25). Minimum wage hike, workplace reforms killed jobs, Doug Ford says. Here are the facts | CBC News.