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The Minimum Wage and the Labor Market

Murat Tasci |

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Research Economist

Murat Tasci is a research economist in the Research Department of the Federal Reserve Bank of Cleveland. He is primarily interested in macroeconomics and labor economics. His current work focuses on business cycles and labor markets, labor market policies, and search frictions. Read full bio

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05.01.07

Economic Commentary

The Minimum Wage and the Labor Market

Guillaume Rocheteau and Murat Tasci New models of employment show that there are some cases in which a minimum wage can have positive effects on employment and social welfare. The effects depend ultimately on the prevailing market wage and the frictions in the market. Evidence to date does not support the view that raising the minimum wage will lead to positive employment effects. The federal minimum wage was established in 1938 by the Fair Labor Standards Act. Initially set at 25 cents an hour, the wage has been raised periodically to reflect changes in inflation and productivity. From September 1997 to the beginning of 2007, the minimum wage stood at $5.15 an hour, but its real value declined steadily from about 40 percent of the average private nonsupervisory wage to a mere 30 percent. Adjusted for inflation, the minimum wage was lower at the beginning of 2007 than at any time since 1955 (see figure 1). Meanwhile, the wage affected fewer people, as the fraction of hourly workers who earned no more than the minimum dropped from around 15 percent in 1980 to just 2.2 percent in 2006. On May 24, 2007, Congress passed a bill raising the federal minimum wage to $7.25 in three phases over two years.

Figure 1 Federal Minimum Wage and Workers at or below It

Source: U.S. Department of Labor, Bureau of Labor Statistics.

To assess whether the recent increase in the minimum wage is excessive or not, one must know what it is intended to achieve. The wages proponents have argued that it exerts positive effects on labor market outcomes by reducing employers excessive market power. Its opponents, however, believe that labor markets are competitive and any wage regulation is bound to reduce employment, especially among low-skilled workers. This debate can be clarified with the aid of economic theories that analyze the effects of the minimum wage on the labor market. These theories can help us answer questions such as: Does a minimum wage necessarily increase unemployment? Does it expand the number of people participating in the labor force? Does it improve social welfare?

Competitive and Noncompetitive Labor Markets

The effect of a minimum wage depends, in part, on whether the labor market is competitiveor not, in which case employers exert significant power over wage decisions. We review the employment effects of the minimum wage under two extreme assumptions: In the first case, there are a lot of employers competing to attract workers; in the second, there is a single employer. These extremes give us two benchmarks from which we can discuss specific situations and markets. A perfectly competitive labor market is a composite of many firms that are in competition for workers. Firms have no power to set wages; the market determines a competitive wage. If a firm deviates from this wage, it either pays less and loses workers or pays more, sustains losses, and exits the market. At the other extreme is a labor market that is a collection of small local markets. In each local market, some firms are in a dominant hiring position (think of a large retailer near a small city, for example). In such an employer- dominated market (referred to as a monopsonistic market by economists), a major employer has the power to set a wage unilaterally without fear of competition. In both extremes, there are large numbers of potential workers, each of whom has a wage below which he will not work (his reservation wage). As the market wage increases, more and more people become willing to work. The relationship between the market wage and the number of workers who want to work for that amount is called the labor supply; it is represented by the upward-sloping curve in figure 2.

Figure 2 Competitive and Monopsonistic Labor Markets

The amount of output that one additional worker can contribute to the total output of the firm (the marginal product of labor) declines as the size of the workforce grows. The diminishing marginal product of labor, represented by the downward-sloping curve in figure 2, is sometimes called labor demand.

Wage Setting in Competitive Labor Markets

When a large number of firms compete for workers, the market wage must be equal to the marginal product of labor. To see the intuition behind this statement suppose that the marginal worker produces $5 worth of goods and services an hour. If the market wage is $4, firms can bid it up to $4.50, attract workers from other firms, and still turn a profit. If the market wage is higher, say $6, firms take a loss because workers cost more than their production is worth. In this situation, firms cut their payrolls to restore their profits. In this case, the market wage should be $5 (w* in figure 2).

The market wage must also equal the highest reservation wage of workers in the labor force: Those whose reservation wage is above $5 stay out of the labor force, whereas those whose reservation wage is below $5 enter it. In other words, under competitive conditions, the wage adjusts to clear the labor market, equalizing labor supply with labor demand. Figure 2 (left panel) shows the market wage as the intersection of the downward-sloping demand curve (the marginal product of labor) and the upward-sloping supply curve. Suppose that Congress introduces a mandatory minimum wage of $6 (w with a line over it). Because it is more than the market wage, the minimum wage is binding. At this higher wage, firms demand for workers declines (from N* to N1 in the left panel of figure 2), whereas the number of people who want to participate in the market rises (from N* to N2 in the same panel). The labor market is thrown into disequilibrium. Some unemployed workers would gladly work for a lower wage but cannot find a job, and some employers would be happy to hire workers at a lower wage but the law forbids it. Thus, in a competitive labor market, a binding minimum wage reduces employment and creates involuntary unemployment.

Wage Setting in an Employer-Dominated Labor Market

Now consider a local labor market in which a large coal mine is the communitys dominant employer (a monopsony). Because the mine has negligible competition from other firms, it can set a wage that maximizes its profits. Unlike a competitive firm, however, a monopsony cannot hire as many workers as it wants at a constant wage. If the mine wants to add workers, it must offer a higher wage to attract new labor-force entrants. Suppose, for instance, that 10 potential hires have reservation wages below $5 and another candidate has a $6 reservation wage. If the mine wants to hire 11 workers, it must raise its wage from $5 to $6 across the board. Thus the mines cost of adding one worker, the marginal cost of labor, has two elements: the $6 hourly wage it pays one person plus a $1 hourly increase for each of the other 10. In this case, the marginal cost of labor is $16 ($6 + $10). The firm maximizes its profits when the cost of having an additional worker equals the value of that persons output. Thus, in the right-hand panel of figure 2, the point where the marginal product of labor intersects with the marginal cost of labor is the employment level for a monopsonistic firm. Notice that the employment level is lower than it would be in a competitive labor market. The wage, which can be read on the labor supply curve for the monopsonistic employment level (denoted wM in figure 2), is lower than the competitive wage. So a monopsonistic firm employs fewer workers and pays them less than their marginal product. Suppose that Congress sets a federal minimum wage that is higher than the monopsonys wage but still below the competitive one. In that case, the curve representing the marginal cost of labor (right-hand panel of figure 2) flattens until it intersects with the labor supply curve. This happens because the cost of an additional worker is now simply the minimum wage (as long as the firm does not want to hire more workers than the number willing to work at or below this minimum wage). In this case, a minimum wage increases employment by mitigating the negative effects of a monopsonys power. All workers gain: More of them have jobs, and those who do receive a higher wage. The employer loses because the minimum wage policy reduces its profits. In fact, the optimal level for the minimum wage is the competitive wage that maximizes employment (right-hand panel of figure 2).

Labor Markets with Search Frictions

Of course, the previous descriptions are extremely stylized and neglect several aspects of reality. In actual labor markets, both firms and workers have some power to set wages, and the market is not frictionless: It takes time and effort for a worker to find a job or for a firm to hire a suitable worker. We can use the benchmark scenarios and a couple of new ideas illustrated in figure 3 (and explained in detail in Understanding Unemployment; see the Recommended Readings) to discuss the effect of

a minimum wage in a labor market with frictions. (This approach is referred to as the search model of unemployment.)

Figure 3 Minimum Wage in a Search Model

In this model of the labor market, workers are either employed or unemployed, and jobs are either vacant or filled. Unemployed workers look for jobs, and firms open vacancies to maximize their profits. The number of vacancies that firms decide to post is given by the downward-sloping vacancysupply curve in figure 3. Intuitively, when the wage is low, each worker generates more profits for the firm; as a result, firms post more vacancies. The wage is determined by bargaining between firms and workers (the wage-setting schedule in figure 3). When vacancies outnumber unemployed people, firms may infer that workers have better job prospects elsewhere. As a firms vacancies increase, the bargained wage rises. Finally, with a given number of vacancies, the Beveridge curve, which summarizes the matching process of unemployed workers and vacancies, specifies the economys unemployment rate. Labor market outcomes such as wages, the number of vacancies, and the number of unemployed are determined by these three building blocksthe vacancy-supply curve, the wage-setting schedule, and the Beveridge curve. Suppose the government introduces a minimum wage that exceeds the market wage (figure 3). The wage-setting curve then has a vertical portion at the minimum wage. As higher wages cut into their profits, firms open fewer vacancies, and the unemployment rate increases (from U* to U with a line over it in the figure). So in this scenario, a binding minimum wage raises both wages and unemployment.

Workers Job-Search Effort

Lets enrich our description of the labor market now by assuming that workers can choose the intensity with which they search for a jobhow much time they spend looking for a job, how many application letters they send out, and so on. Under these conditions, a higher wage exerts two opposing effects: It raises the payoff when workers find a job, which motivates them to look harder. At the same time, it weakens firms incentives to create jobs, making workers less likely to succeed and so dampening their search efforts. The net effect depends on where the wage stood before the increase. To see this, consider two extreme cases where wages initially are either high or low, depending on the extent of workers bargaining power. First, suppose that workers have no bargaining power, firms post wages unilaterally, and workers search until they find an acceptable wage offer. Since employers appropriate the entire surplus from their relationship with labor, unemployed people have little incentive to search actively for a job; the result is high unemployment. Next, consider the other extreme, where workers have all the bargaining

power to set wages. Firms make no profit from hiring more workers. Because opening and advertising vacancies is costly, firms do not do so, and unemployment is high. This means that in markets which tend to be dominated by employers or equivalently, in markets where workers bargaining power is not too high, a compulsory increase of the wage can lead to higher search intensity and higher employment. If the market wage is low, a binding minimum wage can make employment more attractive to workers, which strengthens their search efforts and so reduces unemployment. If the market wage is high, a binding minimum wage might discourage workers from looking for a job because there are fewer vacancies. The search models results are consistent with the monopsony model: A minimum wage can, in theory, reduce unemployment. One can also show that workers search effort and social welfare move together. The wage that maximizes one also maximizes the other. Because of that fact, if the market wage is small enough, a minimum wage improves labor market conditions and increases social welfare. Another interesting result of this model is that the minimum level of unemployment occurs when the market wage is below the one that maximizes workers search effort. This means that a minimum wage can make workers better off even if it increases unemployment.

Labor Force Participation

If we focus instead on workers decision to participate in the labor force (the analog of labor supply in the frictionless models), we can use logic similar to that followed above: If the market wage is very low because workers have little bargaining power, they might decide not to search for a job at all. They have no incentive to enter the market because nonmarket activities (such as gardening) are more valuable than working; hence, employment is low. Conversely, if the market wage is very high, firms are not hiring, unemployment spells are long, and workers stay out of the labor force. In general, employment is a hump-shaped function of the wage. But unlike the model with workers search effort, unemployment always decreases with the wage. Although participation is weaker when wages are low, firms still create jobs because their profits are high. This swells the number of vacancies relative to the number of job seekers, making it more likely that they will find work. If the market wage is too low and workers lack bargaining power, the introduction of a binding minimum wage strengthens labor force participation, even though the duration of unemployment increases. In contrast, if the market wage is high, a minimum wage reduces the supply of vacancies and increases unemployment duration, which discourages workers from entering in the labor force. Ultimately, then, we need to know the prevailing market wage and the extent of market frictions before we can determine whether raising the minimum wage will improve or harm social welfare. Christopher Flinn tried to do just that when he estimated workers bargaining power in a 2006 study. He finds that the market wage exceeds the wage that maximizes workers participation in the labor market, which seems to rule out positive welfare effects of a minimum wage: Our estimates of the bargaining power parameter...yield an optimal minimum wage rate less than the then current value of $4.25.

The Weight of Evidence

The analysis presented here omits several important elements of actual labor markets. Many empirical studies have sought to quantify the employment effects of a minimum wage. According to David Neumark and William Washer, who surveyed this literature thoroughly, most evidence suggests that a minimum wage leads to greater unemployment. And contrary to popular belief, most evidence suggests that the least-skilled workers are those most likely to be harmed the most.

Recommended Readings
Bureau of Labor Statistics. 2007. Characteristics of Minimum Wage Workers: 2006. Pierre Cahuc, and Andre Zylberberg, 2004. Labor Economics, Cambridge, Mass.: MIT Press. David Card, and Alan Krueger. 1994. Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. American Economic Review, 84, 77293. Christopher Flinn. 2006. Minimum Wage Effects on Labor Market Outcomes under Search, Matching, and Endogenous Contact Rates, Econometrica, 74, 101362. David Neumark, and William Washer. 2006. Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research, NBER Working Paper no. 12663. Christopher Pissarides. 2000. Equilibrium Unemployment, Cambridge, Mass.: MIT Press. Guillaume Rocheteau. 2006. Understanding Unemployment, Federal Reserve Bank of Cleveland, Economic Commentary (October 15). Careers | Diversity | Privacy | Terms of Use | Contact Us | Feedback | RSS Feeds

Minimum wage
From Wikipedia, the free encyclopedia

Jump to: navigation, search A minimum wage is the lowest hourly, daily or monthly wage that employers may legally pay to employees or workers. Equivalently, it is the lowest wage at which workers may sell their labor. Although minimum wage laws are in effect in a great many jurisdictions, there are differences of opinion about the benefits and drawbacks of a minimum wage. Supporters of the minimum wage say that it increases the standard of living of workers and reduces poverty.[1] Opponents say that if it is high enough to be effective, it increases unemployment, particularly among workers with very low productivity due to inexperience or handicap, thereby harming lesser skilled workers to the benefit of better skilled workers.
[2]

Contents
[hide]

1 Background 2 Minimum wage law

o 2.1 Informal minimum wages 3 Economics of the minimum wage o 3.1 Simple supply and demand o 3.2 Criticism of the "textbook model" 4 Debate over consequences 5 Empirical studies o 5.1 Card and Krueger o 5.2 Reaction to Card and Krueger o 5.3 Neumark and Wascher o 5.4 Statistical Meta-analyses 6 Surveys of economists 7 Alternatives o 7.1 Basic income o 7.2 Guaranteed minimum income o 7.3 Refundable tax credit o 7.4 Collective bargaining 8 See also 9 References

10 External links

[edit] Background

A sweatshop in Chicago, Illinois in 1903 Minimum wages were first proposed as a way to control the proliferation of sweat shops in manufacturing industries. The sweat shops employed large numbers of women and young workers, paying them what were considered to be substandard wages. The sweatshop owners were thought to have unfair bargaining power over their workers, and a minimum wage was proposed as a means to make them pay "fairly." Over time, the focus changed to helping people, especially families, become more self sufficient. Today, minimum wage laws cover workers in most low-paid fields of employment.[3] The minimum wage has a strong social appeal, rooted in concern about the ability of markets to provide income equity for the least able members of the work force. An obvious solution to this concern is to redefine the wage structure politically to achieve a socially

preferable distribution of income. Thus, minimum wage laws have usually been judged against the criterion of reducing poverty.[4] Although the goals of the minimum wage are widely accepted as proper, there is great disagreement as to whether the minimum wage is effective in attaining its goals. From the time of their introduction, minimum wage laws have been highly controversial politically, and have received much less support from economists than from the general public. Despite decades of experience and economic research, debates about the costs and benefits of minimum wages continue today.[3] The classic exposition of the minimum wage's shortcomings in reducing poverty was provided by George Stigler in 1946:

Employment may fall more than in proportion to the wage increase, thereby reducing overall earnings; As uncovered sectors of the economy absorb workers released from the covered sectors, the decrease in wages in the uncovered sectors may exceed the increase in wages in the covered ones; The impact of the minimum wage on family income distribution may be negative unless the fewer but better jobs are allocated to members of needy families rather than to, for example, teenagers from families not in poverty; The legal restriction that employers cannot pay less than a legislated wage is equivalent to the legal restriction that workers cannot work at all in the protected sector unless they can find employers willing to hire them at that wage.[4]

Direct empirical studies indicate that anti-poverty effects in the U.S. would be quite modest, even if there were no unemployment effects. Very few low-wage workers come from families in poverty. Those primarily affected by minimum wage laws are teenagers and low-skilled adult females who work part time, and any wage rate effects on their income is strictly proportional to the hours of work they are offered. So, if market outcomes for low-skilled families are to be supplemented in a socially satisfactory way, factors other than wage rates must also be considered. Employment opportunities and the factors that limit labor market participation must be considered as well.[4] Economist Thomas Sowell has also argued that regardless of custom or law, the real minimum wage is always zero, and zero is what some people would receive if they fail to find jobs when they try to enter the workforce, or they lose the jobs they already have.[5]

[edit] Minimum wage law

Main article: Minimum wage law First enacted in New Zealand in 1894,[6][7] there is now legislation or binding collective bargaining regarding minimum wage in more than 90% of all countries.[8] Minimum wage rates vary greatly across many different jurisdictions, not only in setting a particular amount of money (e.g. US$7.25 per hour under U.S. Federal law, $8.55 in the

U.S. state of Washington,[9] and 5.93 (for those aged 21+) in the United Kingdom[10]), but also in terms of which pay period (e.g. Russia and China set monthly minimums) or the scope of coverage. Some jurisdictions allow employers to count tips given to their workers as credit towards the minimum wage level. (See also: List of minimum wages by country)

[edit] Informal minimum wages

Sometimes a minimum wage exists without a law. Custom and extra-legal pressures from governments or labor unions can produce a de facto minimum wage. So can international public opinion, by pressuring multinational companies to pay Third World workers wages usually found in more industrialized countries. The latter situation in Southeast Asia and Latin America has been publicized in recent years, but it existed with companies in West Africa in the middle of the twentieth century.[5]

[edit] Economics of the minimum wage

[edit] Simple supply and demand
Main article: Supply and demand An analysis of supply and demand of the type shown in introductory mainstream economics textbooks implies that by mandating a price floor above the equilibrium wage, minimum wage laws should cause unemployment.[11][12] This is because a greater number of workers are willing to work at the higher wage while a smaller numbers of jobs will be available at the higher wage. Companies can be more selective in those whom they employ thus the least skilled and least experienced will typically be excluded. According to the model shown in nearly all introductory textbooks on economics, increasing the minimum wage decreases the employment of minimum-wage workers.[13] One such textbook says: "If a higher minimum wage increases the wage rates of unskilled workers above the level that would be established by market forces, the quantity of unskilled workers employed will fall. The minimum wage will price the services of the least productive (and therefore lowest-wage) workers out of the market. ... The direct results of minimum wage legislation are clearly mixed. Some workers, most likely those whose previous wages were closest to the minimum, will enjoy higher wages. Others, particularly those with the lowest prelegislation wage rates, will be unable to find work. They will be pushed into the ranks of the unemployed or out of the labor force."[14] It illustrates the point with a supply and demand diagram similar to the one below.

It is assumed that workers are willing to labor for more hours if paid a higher wage. Economists graph this relationship with the wage on the vertical axis and the quantity

(hours) of labor supplied on the horizontal axis. Since higher wages increase the quantity supplied, the supply of labor curve is upward sloping, and is shown as a line moving up and to the right.[15] A firm's cost is a function of the wage rate. It is assumed that the higher the wage, the fewer hours an employer will demand of an employee. This is because, as the wage rate rises, it becomes more expensive for firms to hire workers and so firms hire fewer workers (or hire them for fewer hours). The demand of labor curve is therefore shown as a line moving down and to the right.[15] Combining the demand and supply curves for labor allows us to examine the effect of the minimum wage. We will start by assuming that the supply and demand curves for labor will not change as a result of raising the minimum wage. This assumption has been questioned. If no minimum wage is in place, workers and employers will continue to adjust the quantity of labor supplied according to price until the quantity of labor demanded is equal to the quantity of labor supplied, reaching equilibrium price, where the supply and demand curves intersect. Minimum wage behaves as a classical price floor on labor. Standard theory says that, if set above the equilibrium price, more labor will be willing to be provided by workers than will be demanded by employers, creating a surplus of labor i.e. unemployment.[15] In other words, the simplest and most basic economics says this about commodities like labor (and wheat, for example): Artificially raising the price of the commodity tends to cause the supply of it to increase and the demand for it to lessen. The result is a surplus of the commodity. When there is a wheat surplus, the government buys it. Since the government doesn't hire surplus labor, the labor surplus takes the form of unemployment, which tends to be higher with minimum wage laws than without them.[5] So the basic theory says that raising the minimum wage helps workers whose wages are raised, and hurts people who are not hired (or lose their jobs) because companies cut back on employment. But proponents of the minimum wage hold that the situation is much more complicated than the basic theory can account for. One complicating factor is possible monopsony in the labor market, whereby the individual employer has some market power in determining wages paid. Thus it is at least theoretically possible that the minimum wage may boost employment. Though single employer market power is unlikely to exist in most labor markets in the sense of the traditional 'company town,' asymmetric information, imperfect mobility, and the 'personal' element of the labor transaction give some degree of wage-setting power to most firms.[16]

[edit] Criticism of the "textbook model"

The argument that minimum wages decrease employment is based on a simple supply and demand model of the labor market. A number of economists (for example Pierangelo Garegnani,[17] Robert L. Vienneau,[18] and Arrigo Opocher & Ian Steedman[19]), building on the work of Piero Sraffa, argue that that model, even given all its assumptions, is logically

incoherent. Michael Anyadike-Danes and Wyne Godley [20] argue, based on simulation results, that little of the empirical work done with the textbook model constitutes a potentially falsifying test, and, consequently, empirical evidence hardly exists for that model. Graham White [21] argues, partially on the basis of Sraffianism, that the policy of increased labor market flexibility, including the reduction of minimum wages, does not have an "intellectually coherent" argument in economic theory. Gary Fields, Professor of Labor Economics and Economics at Cornell University, argues that the standard "textbook model" for the minimum wage is "ambiguous", and that the standard theoretical arguments incorrectly measure only a one-sector market. Fields says a two-sector market, where "the self-employed, service workers, and farm workers are typically excluded from minimum-wage coverage [and with] one sector with minimumwage coverage and the other without it [and possible mobility between the two]," is the basis for better analysis. Through this model, Fields shows the typical theoretical argument to be ambiguous and says "the predictions derived from the textbook model definitely do not carry over to the two-sector case. Therefore, since a non-covered sector exists nearly everywhere, the predictions of the textbook model simply cannot be relied on."[22] An alternate view of the labor market has low-wage labor markets characterized as monopsonistic competition wherein buyers (employers) have significantly more market power than do sellers (workers). This monopsony could be a result of intentional collusion between employers, or naturalistic factors such as segmented markets, information costs, imperfect mobility and the 'personal' element of labor markets. In such a case the diagram above would not yield the quantity of labor clearing and the wage rate. This is because while the upward sloping aggregate labor supply would remain unchanged, instead of using the downward labor demand curve shown in the diagram above, monopsonistic employers would use a steeper downward sloping curve corresponding to marginal expenditures to yield the intersection with the supply curve resulting in a wage rate lower than would be the case under competition. Also, the amount of labor sold would also be lower than the competitive optimal allocation. Such a case is a type of market failure and results in workers being paid less than their marginal value. Under the monopsonistic assumption, an appropriately set minimum wage could increase both wages and employment, with the optimal level being equal to the marginal productivity of labor.[23] This view emphasizes the role of minimum wages as a market regulation policy akin to antitrust policies, as opposed to an illusory "free lunch" for low-wage workers. Another reason minimum wage may not affect employment in certain industries is that the demand for the product the employees produce is highly inelastic;[24] For example, if management is forced to increase wages, management can pass on the increase in wage to consumers in the form of higher prices. Since demand for the product is highly inelastic, consumers continue to buy the product at the higher price and so the manager is not forced to lay off workers.

Three other possible reasons minimum wages do not affect employment were suggested by Alan Blinder: higher wages may reduce turnover, and hence training costs; raising the minimum wage may "render moot" the potential problem of recruiting workers at a higher wage than current workers; and minimum wage workers might represent such a small proportion of a business's cost that the increase is too small to matter. He admits that he does not know if these are correct, but argues that "the list demonstrates that one can accept the new empirical findings and still be a card-carrying economist."[25]

[edit] Debate over consequences

Various groups have great ideological, political, financial, and emotional investments in issues surrounding minimum wage laws. For example, agencies that administer the laws have a vested interest in showing that "their" laws do not create unemployment, as do labor unions, whose members' jobs are protected by minimum wage laws. On the other side of the issue, low-wage employers such as restaurants finance the Employment Policies Institute, which has released numerous studies opposing the minimum wage.[26] The presence of these powerful groups and factors means that the debate on the issue is not always based on dispassionate analysis. Additionally, it is extraordinarily difficult to separate the effects of minimum wage from all the other variables that affect employment.
[5]

The following table summarizes the arguments made by those for and against minimum wage laws: Arguments in favor of Minimum Wage Laws Supporters of the minimum wage claim it has these effects:

Arguments against Minimum Wage Laws Opponents of the minimum wage claim it has these effects:

Increases the standard of living for the poorest and most vulnerable class in society and raises average.[1] Motivates and encourages employees to work harder (unlike welfare programs and other transfer payments).
[27]

As a labor market analogue

Stimulates consumption, by putting more money in the hands of low-income people who spend their entire paychecks.[1] Increases the work ethic of those who earn very little, as employers demand more return from the higher cost of hiring these employees.[1] Decreases the cost of government social welfare programs by increasing incomes for the lowest-paid.[1] Encourages the automation of industry. [28] Encourages people to join the workforce rather than pursuing money through illegal means, e.g., selling illegal drugs [29] [30]