While my wife and I sat down to eat some lunch together, a YouTuber we follow posted a new video. Excited, we opened it up to watch. Immediately, a presidential campaign ad popped onto our screen telling us that if a certain candidate gets elected, he will raise minimum wage up to $15 per hour. Just this past week, I learned about Price Floors in my Microeconomics class, and the ad got me wondering about what would actually happen if minimum wage were to increase so dramatically. So I grabbed my pen and a napkin and got to work by drawing up a couple quick graphs.
Assuming a uniform minimum wage across the country, let's say that we're currently have a minimum wage of $8. I didn't actually do any math or averages, this is just an arbitrary number.
When we go to our minimum wage paying jobs, we are essentially selling an hour of our labor for $8. If this is the optimal price (meaning if this is the price we've reached by buying and selling and buying and selling until we've reached an equilibrium point where buyers and sellers are both getting as much out of the trade as possible), then we're participating in an efficient market. On a Supply and Demand graph, we would see that there are areas above and below our $8 price leading right up to the equilibrium point that represent gains from trade. Again, we are going to assume this is the best price for an hour of labor and that our market is efficient.
Now let's introduce a price floor. By saying that minimum wage is now $15, we are saying that companies cannot pay their employees any less than $15 for an hour of their labor. That price is much steeper. Logically, we can expect that with higher prices for labor, companies will start to look for alternatives. Maybe they start outsourcing to other countries where labor costs less. Maybe they cut down on their staff to make sure they can afford whoever's left. A likely possibility is they need a lot of labor to run their business, so they raise prices on their customers to afford all their employees. If their customers need to pay higher prices, they'll likewise charge higher prices to their customers until these high prices affect housing, groceries, utilities, and such. Basically, I expect that a higher price on labor would back all the way up and eventually cause an increase in the cost of living. If an hourly wage of $8 per hour isn't high enough to pay for all necessary living expenses, neither would $15 per hour because the price for the same quality of life would rise, too, catching up with the $15 per hour and leaving us in the same situation as before.
Additionally, if we return to our graph, we see that with a Price Floor of $15 per hour, the Demand Curve intersects with that Price Floor long before the Supply Curve does. This means in the event of a Price Floor enforced on the country, there would be more people selling their labor than there are employers buying labor. A surplus of labor is equivalent to a shortage of jobs and it all means unemployment. Only people who are quick on the trigger and sell their labor fast will get a job. Everyone else who waits too long will miss out and won't find any buyers.
To summarize, I expect that a uniform increase in minimum wage across the country would result in increased unemployment and a higher cost of living. There may still be other variables that could factor in on this that I haven't addressed such as inflation, deflation, the possibility of a Price Ceiling (or a maximum that employees could be payed), or whether or not Yellowstone erupts and sends this whole nation sky-high before we can see how the election turns out. But all in all, a quick YouTube ad gave me a cool economic exercise for lunch.
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