The Biz Bucks Guy believes everyone should understand the basic Supply and Demand Model from micro-economics. One example of its use leads to an understanding of the effects of minimum wage laws and price controls, in general. In Part A, let’s look at the model itself and see what it tells us.
Referring to the diagram, first note this is supply and demand for unskilled workers. The supply curve is an upward sloping line in red. Demand is a downward sloping line in green. Where these two lines cross is the equilibrium point (Pe), also called the Market Clearing Price. The market clears a price on which both unskilled workers and employers of unskilled workers agree. The employers can’t pay more. The workers won’t accept less. The market is in quiescence. Both parties hope for a different outcome, but both agree this is a reasonable wage for such work.
Then, a governmental entity passes laws to mess with this efficient market. Politicians think they can garner votes by manipulating the market and forcing a price above the natural market clearing price. Government “divines” a new price (Pf), a floor for paying unskilled workers.
What does this accomplish?
The suppliers of unskilled workers, meaning the workers themselves, are thrilled. They get to earn more per hour. The quantity supplied of such workers increases from the prior equilibrium point. People come out of the woodwork to look for jobs.
However, the demanders of unskilled workers, such as fast food restaurants, construction contractors, small businesses, etc., can’t afford to hire at these inflated wages. They cut back. They innovate with technological changes, such as automated ordering at the local burger shack. They do some menial work themselves like sweeping up at the end of the day that their high school helper formerly did after school. The quantity demanded moves down from the prior equilibrium point.
When quantity demanded is greater than quantity supplied, it is called a surplus. In this case, it’s a surplus of unskilled workers. The government has created it. Of course, a surplus of workers is the same as a shortage of jobs.
It is an axiom of micro-economics that ALL SHORTAGES ARE CREATED BY GOVERNMENT INTERVENTION INTO MARKETS.
In Part B, we will look more at the ramifications of minimum wage laws. In Part C, we will discuss how minimum wage laws began and cite several examples of price controls, in general. Part C will also divulge most economists’ view of what the minimum wage should be.