A seemingly simple question: should we raise the minimum wage?

Whenever election time comes around, we hear a lot of debate from the candidates about minimum wage. Typically, the candidates' positions split down party lines. Democrats usually want to increase minimum wage, thinking that this will help lower poverty levels; Republicans normally oppose this because they argue that the change will not help - and may actually hurt - poorer Americans. Setting party lines aside, who is right? How can we actually help poor Americans?

In David Brook's article, "The Minimum-Wage Muddle," he tries to ascertain the answer to this very question by examining past trends and basic laws of economics. As a student in Microeconomics this fall (shoutout to Econ 102 Section 1), I thought that this was an awesome application and way to showcase my knowledge.

The way markets work is that they are always seeking an equilibrium where consumers are willing and able to buy a certain number of goods, and firms are willing and able to sell them. If firms try to sell a product for a higher price, fewer people will buy it. This will cause a surplus. In response, the firms will lower their price to sell their stock. If the situation is reversed and the price is too low, there will be a shortage of the good and the suppliers will start selling the good at a higher price. So, eventually the market will gravitate toward the equilibrium price and quantity.


Minimum wage disrupts this relationship because it puts what is known as a price floor on the good, which in this case is labor. When a price floor is put on a good, that means the price is higher than the equilibrium price. As I mentioned above, that will cause a surplus. In other words, more people will be looking for jobs than firms are looking for employees. People who are able to get jobs will be better off, but there will be more people who don't get jobs.

Another effect is that the people applying for minimum wage jobs will become more qualified because they are unable to find employment elsewhere. These more qualified people will get the jobs while unskilled workers may be cut out of the market. So, middle class families may benefit from minimum wage while in the meantime, lower class families are suffering.

Additionally, a study done at Stanford revealed that many times owners will increase prices in response to having to pay higher wages. Since many of the places that hire minimum wage workers sell their products to poorer Americans, the poor are in essence paying a tax to help employ the middle class.

Now, while all of the assertions I have made up until this point are true, they are all based on a simplified model of the world. These models cannot be accurate in every situation. There have actually been instances where minimum wage has helped increase pay without decreasing employment (see here).

So, what does this mean? Have we gotten any closer to finding the answer? The short answer is that it really depends. There are always trade-offs involved. It cannot be denied, however, that the poorest people are hurt by minimum wage. So, when looking at candidates in this year's election, think long and hard about what you value. While both parties have good intentions, their methods of economic policy have two very different effects.

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