Bob Murphy on Minimum wages and a textbook graph to illustrate it

One of the unfortunate consequences of this crisis is increased political backing for “reforms” that have negative impact on aggregate supply. In the US in the 1930s it was the horrible National Industrial Recovery Act (NIRA) and in today’s US it is higher minimum wages. I find it incredible that anybody seriously would question the negative supply side consequences of higher minimum wages. This is not a political issue, but a simple question of understanding the laws of supply and demand.

Anyway Bob Murphy explains it well in this Youtube video.

Of course you can also just look at a standard textbook graph. It should be pretty easy to understand.

Minimum wage

W eq is the equilibrium wage that would emerge in an unregulated labour market with no minimum wage. In such a market employment would be N eq.

W min is the minimum wage, which is higher than the equilibrium wage (W eq). In such a world the demand for labour will be only N2, while the supply of labour will be N1. The difference between the N2 and N1 obviously is the level of unemployment caused by the minimum wage.

You really don’t need anything else than that to understand this issue…Or as Paul Krugman once said:

“So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment.”

PS Paul Krugman apparently no longer thinks that a higher minimum wage increases unemployment, but I will leave that to David Henderson to explain.

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