Red scare, pt. 1

What was otherwise a pleasant trip to Seattle last week was tainted by a chapter in the Microeconomics textbook I've been reading for this online class which discussed the impact of government intervention in the free market. Let's be clear -- I despise this textbook. I find its conversational tone insulting and its presentation of the material one-sided, but I still feel like it's important to know about this stuff, and I do find it interesting.

So we talked about per-unit taxes, price ceilings and price floors. All the examples in the book are of course very pro-market and pro-globalization, but their discussion of minimum wage really gets me. Looking at minimum wage from a supply and demand point of view, we have this (very simplified) example:


The red line shows the supply of labor available for a given wage; the blue line shows the demand for employees within the same wage range. The grey point is the market price for wages -- the point at which the demand for employees matches the supply of labor -- in this example, $5/hour with 5 people employed. The black line marks the price floor for wages at $6/hour set via government legislation -- in this example, slightly higher than the market price for wages. At $6/hour, the supply of jobs (or demand for employees) drops to 4 jobs because employers can't afford five employees at the new rate. However, for $6/hour, 6 people are now willing to work and are interested in employment. This 'creates' a scarcity of jobs -- the gap between the demand for and supply of jobs, also known as the unemployment rate, marked in green.

The book claims that the potential effects of setting a minimum wage include the following:

1. an increase in unemployment because firms can't afford to hire as many workers at the higher rate


2. worse working conditions and cuts to career-building programs because firms take money from workplace niceities to afford rising labor costs


3. buoying the incomes of middle class teenagers who are not relying on their paychecks for subsistence anyway and therefore are not the primary targets of the increase in minimum wage.

I think the teenager point is total bull crap, and honestly what business that pays their workers minimum wage is actually bankrolling career-building workshops for their employees? The bit about work conditions can be regulated for separately. Even if it causes the cost of goods to go up, I think paying something closer to the true price for things is more sustainable in the long run. I can see concern about the drop in employment (in my example) from 5 jobs to 4 jobs, but saying minimum wage is responsible for the gap between the 6 people looking for work and the 4 jobs available seems unfair.

I guess what I want is an economic defense of minimum wage. I want something that can speak to the points that these no-regulation economists will bring up in relation to this and other issues of intervention without just getting all hot in the collar about it. I get hot in the collar already!