THE MINIMUM WAGE
The job market is like any other; it is primarily dictated
by the laws of supply and demand. When supply exceeds demand, then prices
naturally go down.
In modern economies, the supply of workers always exceeds the number
of available jobs. This situation is intentional. It is called the "natural
rate of unemployment," and economists peg the optimal rate at 6 percent.
When the actual unemployment rate goes above or below this, the Fed usually
contracts or expands the money supply to bring it back in line.
Why would the Fed do this? Because our economy needs a reserve pool
of labor to remain flexible and capable of change. This way, there is always
a percentage of the work force that is educating or retraining itself.
It also allows the market to fill sudden demands of labor. If we were to
somehow achieve 100 percent employment, stresses and strains would only
begin growing within our economy. The natural rate of unemployment is therefore
a cost of doing business, and as such, businesses should pay for it (through
unemployment compensation, for instance).
However, a 6 percent unemployment rate has ramifications at the lower
end of the work force. Because the number of available workers always exceeds
the number of jobs, it is an employer's market. The boss gets to dictate
wages, and, of course, these wages are usually as low as possible.
The law of supply and demand in the job market was dramatically illustrated
during the "Massachusetts Miracle" of the 80s. Then, unemployment
fell to a phenomenally low 2.7 percent. And McDonald's began offering starting
wages of $7 an hour to attract workers.
However, at 6 percent unemployment, employers can force entry-level
workers to work below the poverty level. Of course, opponents to the minimum
wage object to this characterization. They claim that entry-level wages
are the result of a mutual agreement between employer and employee. If
the worker does not like the wages offered, then he or she can simply look
for another job. Better yet, the worker can look for or train for a job
that is not entry-level.
Both of these suggested options are flawed. By brute force, a certain
percentage of jobs are going to be entry-level -- the only way there can
be no bottom to the totem pole is if there is no totem pole at all. So
the job market will always have new workers and entry-level jobs; it is
Nor does the worker have the option of turning down a low-wage job
in favor of searching for a better one. The 6 percent unemployment rate
works against this option. Let's work the problem out according to game
The job applicant's options for any single job offer are:
1. Take the minimum wage offer, and have a means of living.
2. Refuse the minimum wage offer, and starve.
3. Attempt to negotiate for a higher wage, which fails because there
is another unemployed person willing to take the minimum wage, because
is better than nothing.
The employers options for any single job applicant are:
1. Hire this applicant at the minimum wage.
2. Hire this applicant at a higher wage.
3. Refuse to hire this employee at a higher wage, in favor of another
unemployed person to whom the minimum wage is better than nothing.
The employer wins this game because he has two best options (#1 and
3) compared to the applicant's one (#1).
The fact that a fortuitous feature of the job market can allow employers
to exploit entry-level workers for sub-poverty wages is one of the rationales
behind the minimum wage.
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