Thursday, August 2, 2007

The Minimum Wage

I know I am few days late and the Federal Minimum Wage jumped up, but I recently came across this article on the minimum wage at the Federal Reserve Bank of Cleveland's website. Their conclusion should be familiar to anyone who has taken Econ 1A, when you increase the price of a good (Or in this case labor), you will consequently lower the demand. More in depth studies I have read, posit that the welfare gains to the lottery winners (those who keep their jobs) are more than offset by the welfare losses to those who gain into unemployment. Another argument is that by reducing the number of low wage (and hence low skill) jobs we are also making it more difficult for the unskilled to gain entry into the work force. Also, whenever you raise the price of something above its market clearing price you create incentives to form a black market. The cigarette market is a perfect example. Before the anti-smoking forces managed to jack up prices, there was very little black market activity in cigarettes. In places like New York City, there is a huge black market thanks to the Indians which do not have to pay the city tax. Regulation in interfering with the price mechanism has a multitude of unintended consequences, and the minimum wage bill, while making for good political theater, will ultimately end up hurting the people it is intended to help.

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