The Truth About Minimum Wage


By: Henrique Vasconcellos

A couple weeks ago during class, I stated that minimum wage was bad for the economy, for the employers and for the employees. However, I believe I was not able to clearly explain the reasons why it is a bad thing from a socio-economic perspective. People do not like to think that anyone’s labor is worth less than the minimum wage. An existing minimum wage gives the false impression of a certain dignity premium that every individual should have for its labor. However, setting a line of $7.50 (or any other value) for an hour of work, simply exclude people who were willing to receive less from the labor market.

To understand the reasons why minimum wage can be harmful, it is necessary to undersand the idea of equilibrium. The economic equilibrium, is a state where the forces of demand and supply are equal and balanced. The equilibrium, is also referred as the optimum balance between supply and demand, and it can be applied to many other variables, such as interest rates and the number of employment opportunities in a sector.  The Graph below shows how the supply and demand for labor is affected by minimum wage policies.

In this case, the equilibrium is where both lines cross each other, in other words, the optimum social quantity of labor x wage is where both lines cross. Implementing a minimum wage policy to the above equilibrium will reduce demand for jobs, resulting in unemployment. Suppose the equilibrium was at $5, however, due to policies the minimum wage is set to $7.50. in this case, the offer for jobs (or people willing to receive $7.50 for a certain job) will be higher than the original offer ($5). However, due to the higher cost of labor, the demand for workers will be smaller than during equilibrium. The result of this shifts is an increase in unemployment. However, the interesting thing about minimum wage is that it does not affect people with high paying salaries, these. It harms the most vulnerable in our society, it harms the poor people who will never get employed because the value of their work is below the minimum wage. 

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