Principles of Economics, 5th Edition by Mankiw N. Gregory

Author:Mankiw, N. Gregory [Mankiw, N. Gregory]
Language: eng
Format: mobi
Publisher: South-Western
Published: 2010-01-24T16:00:00+00:00

MINIMUM-WAGE LAWS

Laws setting a minimum wage that employers can pay workers are a perennial source of debate. Advocates view the minimum wage as a way of helping the working poor without any cost to the government. Critics view it as hurting those it is intended to help.

The minimum wage is easily understood using the tools of supply and demand, as we first saw in Chapter 6. For workers with low levels of skill and experience, a high minimum wage forces the wage above the level that balances supply and demand. It therefore raises the cost of labor to firms and reduces the quantity of labor that those firms demand. The result is higher unemployment among those groups of workers affected by the minimum wage. Although those workers who remain employed benefit from a higher wage, those who might have been employed at a lower wage are worse off.

The magnitude of these effects depends crucially on the elasticity of demand. Advocates of a high minimum wage argue that the demand for unskilled labor is relatively inelastic so that a high minimum wage depresses employment only slightly. Critics of the minimum wage argue that labor demand is more elastic, especially in the long run when firms can adjust employment and production more fully. They also note that many minimum-wage workers are teenagers from middle-class families so that a high minimum wage is imperfectly targeted as a policy for helping the poor.

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