Prices, for labor as well as everything else, tend to fall toward an equilibrium price based on interaction between supply and demand. If supply is too high, if there is a surplus of goods relative to demand, then prices will tend to fall in order to increase demand. Producers will eventually cut production so that the surpluses do not continue. On the other hand, if supply is too low, if there is a shortage of goods that people want, then prices will tend to increase, which will prompt existing producers to make more product, or will entice additional producers into the market. Production increases, and prices will return to equilibrium.
In the case of “selling” labor, the supply is controlled by the willingness of people to enter the labor market, and demand by the willingness of employers to employ them. So if you imagine a particular job, say toothbrush salesperson, (although the same mechanisms would apply to the “average wage” across the whole economy), you can imagine a supply schedule. At a certain salary, say $20,000 a year, there may be 10 people who would be willing to travel around the city visiting dentists and pitching toothbrushes. Now, if the toothbrush manufacturer were offering $80,000 a year for dental health crusaders, they would probably get a lot more applicants. Of course, at $80,000, the toothbrush people couldn’t afford nearly as large a toothbrush sales force as they could at $20,000 a person, so the demand schedule would show an inverse relationship. Larger the salary, the fewer people employed.
Now the textbook shows a pretty little picture like this one. You can easily see where the equilibrium price ought to be, where the two lines cross. Simple right? *
Now the fun starts if there is a price floor—a minimum price that must be observed regardless of market conditions. The minimum wage is an example of a price floor. The price floor boosts the price above the pretty little equilibrium, so then you end up with a graph that looks more like this:
The second graph shows the ugly green gap between the supply of labor and the demand of labor—representing all the people who would be willing to work but who can’t get jobs because the employers can’t afford to pay them at the higher than equilibrium wage floor. That ugly green gap is the compassionate conservative’s explanation for why the minimum wage is a bad thing. It creates unemployment. The conservatives pose a conundrum to minimum wage advocates: Which would you prefer? More people with lower paying jobs, or more people with no jobs at all?The book quotes “other economists” as saying that the minimum wage is somewhat of a moot point. And it may be true that most American workers are already paid well above minimum wage, in which case the ugly green gap isn’t worth much consideration because it is either nonexistent or negligibly small. However, if this is true, it is not because the equilibrium price for labor for American companies has risen. Instead, I am quite confident that the equilibrium price of labor has fallen dramatically, for the simple reason that American companies are not just paying American workers anymore. Free trade policies and ever more efficient transportation have ushered in the era of globalization, which has meant that on our pretty little labor supply and demand graph, the supply line has shifted massively to the right, bringing the equilibrium price dramatically down. A global context is thus crucial to the consideration of labor dynamics. Businesses certainly look at labor decisions that way. Shouldn’t macroeconomics as well?
From a global perspective, we can begin to see the other side of the minimum wage argument. Many countries around the world have posed the minimum wage conundrum, and have decided (or had it decided for them) that they prefer more people with lower paying jobs. And is that the right choice? GDPs have certainly risen in some countries. And global sweatshop scandals have led to international pressure for at least basic worker’s protections. But some economists have argued that countries can get stuck in a poverty trap. Without spare income for investment, without imports to balance out exports (which leads to a devalued currency), and without adequate human or technological capital (which tends to get “brain drained” away to more advanced economies with more opportunity), workers in poor countries spend their meager incomes before they’ve earned them, and the economy never gets to a point of self sustaining growth. Sounds like a cycle of dependency on a macroeconomic scale that could be quite similar to that on a microeconomic scale of families at the bottom of the economic ladder in “developed” countries. Would a global minimum wage break the cycle? Or would it just cut developing countries out of any economic activity whatsoever?
Thus we see that the old minimum wage conundrum now can be recast as an interrogation of globalization itself. The minimum wage has always been a fascinating policy argument, either on practical or purely philosophical/ethical grounds. In either mode of argument, however, these days it is crucial to consider a global context.
* The supply and demand curve of labor is a model, so it is by definition a simplified version of reality. But even just considering the behavior of labor supply and demand themselves (leaving alone all the other factors that could influence supply and demand and price for labor), I imagine the graph would be a bit more simplistic. Labor supply is not a very elastic factor, because most people can’t simply decide not to work. So the quantity of available labor is likely to stay quite high, even at low wages, because people have to work for something. Similarly, as the price of labor goes up, the quantity demanded will decrease at an accelerating rate, as incentives to replace labor with technology or other means increase. So I imagine a supply and demand curve would look more like this:Downey, Matthew. Contemporary’s Economics.
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