Showing students how to analyze price floors and ceilings with the supply and demand model is an important part of the principles of economics course. That was the scheduled topic for us in the course today and Governor Jerry Brown provided us with a big teaching moment when he signed into law yesterday a new $10 minimum wage for California to be phased in over the next three years. Unless there are big changes elsewhere, it will be the highest in the country—33 percent higher than the federal minimum wage.
Of course the diagram is simple, and not surprisingly led to a great deal of interesting discussion inside and outside the classroom.
A government mandated minimum wage above the market wage creates a gap between the quantity of labor demanded by firms and the quantity of labor supplied. The higher the minimum wage the lower the quantity of labor demanded and the higher is the unemployment rate for affected low-skilled workers. The debate among economists is whether the decline in employment is significant, a debate which can be simply illustrated by drawing in a very inelastic labor demand curve in the diagram.
There’s still a lot of disagreement among economists about the empirical evidence, but in a recent review paper, David Neumark, Ian Salas, and Bill Wascher sensibly “conclude that the evidence still shows that minimum wages pose a tradeoff of higher wages for some against job losses for others, and that policymakers need to bear this tradeoff in mind when making decisions about increasing the minimum wage.” I didn’t hear many Sacramento policymakers saying much about this tradeoff in the months and days leading up to yesterday’s vote.