Alex Tabarrok (reference below, video on right) analyzes the minimum wage in terms of the four typical unintended consequences of a Price Floor:
- Lost gains from trade (deadweight loss)
- Wasteful increases in quality
- A misallocation of resources
A minimum wage creates a surplus
Tabarrok shows how the minimum wage creates a labour surplus (otherwise known as unemployment), by increasing the quantity of labour supplied at the regulated price floor, and decreasing the quantity of labour demanded.
Tabarrok notes that the minimum wage is hotly debated in the U.S. and summarizes the likely impacts of a modest increase:
But he also notes that a large increase in the minimum wage would cause serious unemployment. He cites the historical example of Puerto Rico which, in 1938, was included in the national U.S. law increasing the minimum wage to $0.25/hr when the average wage in Puerto Rico was less than $0.05 per hour. This led to bankruptcies of Puerto Rican firms and massive unemployment and a demand for exemption from the law.
Tabarrok uses France as an example of the negative effects of a minimum wage, as well as laws making it difficult to fire workers:
A minimum wage creates lost gains from trade (deadweight losses)
Tabarrok uses the following graph to demonstrate the second effect of price floors:
From http://www.mruniversity.com/node/201803, accessed 1 May 2016.
- A review of the jargon: Is the minimum wage a “price ceiling” or a “price floor?”
Atlas topic, subject, and course
Alex Tabarrok, Price Floors (after 2:30 of 10-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/rent-controls-economics, accessed 1 May 2016.
Page created by: Ian Clark, last modified 1 May 2016.
Image: Alex Tabarrok, Minute 0:13 of Price Floors, Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/rent-controls-economics, accessed 1 May 2016.