Economics is not as certain as some people make out – the minimum wage

by frog

In economics theories come into fashion, wane, get tossed onto the junk heap and sometimes dusted off and given another run around the block. For example, the minimum wage:

A common claim is that wages are like any other price and as such obey the economic laws that govern supply and demand. Therefore, raising the minimum wage (or having any minimum wage, actually) is a bad idea because it causes some people to be too expensive to employ, leading to unemployment.

As a counter to the conventional argument, consider this:

Historically New Zealand has had no unemployment for many years (till recently) as we were living under a regime that made lowering unemployment to zero a priority. (At zero unemployment there will still be approximately 2% unemployment because of churn.  On average everybody spends one year in fifty looking for a new job whilst not working). When the government ensures that zero unemployment exists, the simple supply-demand model breaks down and raising the minimum wage does not increase unemployment, it simply transfers wealth from the who invest to those who labour.

The idea that raising the minimum wage will shut down businesses is not true in our economy.

Not to say there do not exist examples of businesses that would close – because we aim for zero unemployment that frees up resources for new businesses to start – but we are talking *macro* economics here.  In our economy the people being paid minimum and near minimum wage are doing jobs that must be done.

Subway’s existence does not depend on paying its workers $12.75 an hour.  Same for cleaners, bus drivers etcetera.  Almost as many of those people will be employed at $5 per hour as at $15 per hour, because the roles they fill are not ‘nice to haves’, like landscape architects or interior decorators.


Raising the minimum wage is a transfer of wealth from those who invest to those who labour.  Those who labour tend to spend their income where they live (food and housing making up a much larger proportion of their income) causing a local boost to the economy.

I hope that is enough to demonstrate that economics is hard and often counter intuitive.  It is also beset by conflicts of interest (e.g. economists employed by banks or governments), embedded values and ideology.

I am not an economist and don’t pretend to be able to pass expert judgement on the subject. I present this as an example of an alternative economic theory, to demonstrate that economics is mostly made up of competing theories and ideas, not hard facts and proven mathematical models that apply in every situation.

It’s not like physics or chemistry where fundamental laws are discovered which are eternal and that apply throughout the universe – there are people involved, and people are messy. People change, and economics needs to change with them.

frog says

Published in Environment & Resource Management by frog on Thu, February 25th, 2010   

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