Okay, I'm going to take on very sensitive issue, the minimum wage. The minimum wage is based on the idea of fairness, it sets by law the minimum payrate an employer can pay an employee. I am going to explain why this policy leads to greater unemployment and prevents the poor from entering the labour market increasing their skills.
Below, I have crudely drawn diagrams of the market for low skilled and skilled labour. In any market there is supply and demand. Where these two curves meet is at a price where both the supply and demand are exhausted and the market has cleared. The amount of the good or service supplied is the same as the amount demanded. On the below diagram there is a horizontal line indicating the minimum wage. For skilled labour the market equilibrium E is above the minimum wage and therefore the minimum wage does not affect that market. However, for low skill workers the the minimum wage is above the equilibrium which means there is more supply of labour than demand. This results in unemployment. This situation is good for those low skill workers lucky enough to get a job as they will be paid above market rates, equally it provides a safety net for skilled workers incase they ever need to drop down to low skill work. The losers are those people whose productivity does not justify earning the minimum wage and are excluded from the labour market. These people are the poorest and least educated in our society and as Milton Friedman pointed out in his tv series 'free to choose' it prevents those people without a formal education from gaining training in the workplace by working at a payrate where employers would be interested in hiring them.
I can say from my experience as an employment consultant there are many unseen victims of these industrial policies whose productivity doesn't justified earning $18-$20 an hour. Such people would need a large investment in time an energy by an employer before their productivity would raise to such a point. Fortunately, there are tools to allow employers to train such workers, the traineeship. Unfortunately, the administration of setting up a traineeship prevents this tool from helping more people at the bottom of the labour market.
On a final note, I should point out that there is a decenting view on the traditional view of the minimum wage. Card and Krueger 1993 found that when the minimum rate in New Jersey was raised the employment opportunities increased. I have provided the link so you can decide for yourself. http://www.nber.org/papers/w4509
I read a piece that said lets image you are a employer looking to hire someone at minimum wage and you had two people to apply. One was black and had a criminal record while the other was a white boy with no criminal record. Who would you hire? If the black guy could offer his services as a few dollars less if would make him a better possibility. You can change black to ugly/fat/tall/gay/red hair/young/smoker/female/etc if too confronting. The other issue with a minimum wage or award wage is that some employers and even employees think that is a fair wage so it is accepted when in reality the market rate is much higher. In many cases this is stopping workers getting fair pay.
ReplyDeleteThey may still hire the person without the criminal record for more or they may take a chance on the former criminal. We already in fact allow employers to pay less than the award through wage subsidies. Trainedhips are another way of reducing what an employer has to pay but the administration is a major disincentive.
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