Obviously, the title of this post is a knock on Kanye West and his somewhat retarded observations about Bush. Granted it is probably unlikely that Granholm actually hates African Americans, but she is Canadian so her motives are a mystery. Regardless, the argument that Granholm dislikes African Americans is much easier to show than Kanye’s argument. Just take the following two quotes:
“This is a tremendous victory for our working families and for all of Michigan,” said Granholm.
“The majority of the working poor are not helped by a minimum wage hike, and the vast majority of those who benefit do not live in poor families,” said Richard Burkhauser, professor and chairman of Cornell’s department of policy analysis and management.
So, what does this have to do with Granholm and black people? Well, a study done by Burkhauser and Sabia found the following: a 10 percent increase in the minimum wage causes four times more employment loss for employees without a high school diploma and African American young adults than it does for more educated and non-black employees.
Minimum wage is one of the many misguided programs established by the government to treat a symptom of a problem rather than the source. I know a lot of people do not understand the basic economic principles associated with price floors, so I have decided to put together a graph to help explain the concept.
The graph looks complicated, but it is not. The Y-axis indicates different wages, and the X-axis indicates a number of jobs (no numbers are given since this is hypothetical). The red line indicates how many workers will want to fill a certain position at a certain wage. It is upward sloping because the more the job pays; the more people will want it. The blue line indicates the number of jobs that will be made available at a certain wage. It is downward sloping, because business would gladly hire more people if they wanted less money.
The point where S (red line) and D (blue line) intersect represents the natural equilibrium for the market. In other words the meeting of the minds between the workers and businesses as they both agree to provide a number of positions for a number of workers at the same wage. In this graph, we say that this equilibrium wage is $5.15 (indicated by the lower gray line), granted the real equilibrium wage is probably lower, but this is just a hypothetical for this ex-ample. Now, say the government decided to raise minimum wage from $5.15 to $7.15 (indicated by the upper gray line). By increasing the minimum wage, we follow the demand curve (blue) to the point where it intersects the upper gray line. As a result, we see a drop in jobs businesses are willing to supply. Additionally, there are additional costs on society.
Without minimum wage, the area above the lower gray line and below the demand curve represents consumer surplus. This is the virtual benefit that businesses would achieve since they were willing to hire at higher wages for fewer employees but did not have to. The area between the lower gray line and the supply curve (red) represents producer surplus. This area represents virtual benefits to the workforce, because they were willing to work for lower wages. Now, as we see with the shift in the vertical line, there are two gray shaded areas A and B. These areas represent “dead weight” losses. The area A indicates what consumer surplus was previously and the area B indicate what producer surplus was previously. Since minimum wage prevents the market from operating in this area society carries the burden. The area D represents the consumer surplus, which is dramatically less, because we see the new area E that represents area that was formerly consumer surplus now become producer surplus. Thus, we now have a much larger producer surplus of the areas of C and E together.
Now, maximizing the producer surplus is not an issue here, because all that represents is greater benefit for the workers and I don’t have a problem with that. The problem lies with the dead weight losses. You can basically think of it this way: the dead weight area represents jobs that were destroyed by the increase in minimum wage.
As a result of job reduction, that means that the unskilled labor market becomes more competitive so lower skilled workers are pushed out. Thus, by increasing minimum wage you are hurting low income workers by reducing the availability of jobs.
You can take into consideration the hypothetical added value to the employees who manage to keep their employment. Well, it would initially appear that they would benefit, because their hourly wage is increased. However, since most minimum wage hikes exist below the poverty line, government programs just absorb the difference. So, say in a very simplistic way the government supplements wages by $3, make an effective wage $8.15, now after minimum wage is increased the supplemental income drops to $1, so the effective wage is still $8.15. So, from their prospective everything is basically the same.
Let’s take a look at the goals of minimum wage:
1. Prevent low paid work
2. Simulate economic growth by increasing buying power, and discouraging labor intense indus-tries (resulting in more investment in training, etc…)
Now, the first “benefit” has no real value. If the market is will to supply labor at a low cost it should be allowed. However, if you are trying to avoid exploitation, that is another matter I address later on. The second benefit is illusory. You don’t increase the buying power of the individuals due to the absorption of benefits by government programs. Furthermore, you actually impede economic growth by reducing the total amount of jobs on the market. Also, there is not intrinsic value in discouraging labor intense industries, if there is a market for the good there is no reason to stop it, it should be naturally regulated by how high a wage people demand to do it. The bottom line is that there is no justifiable argument for minimum wage.
Minimum wage should be abolished. There are better ways to help impoverished workers than by enforcing a minimum wage. Basically, what the government needs to do is own up to the task and pick up the slack rather than forcing the burden on to industry that then intends shifts the burden onto society. My general recommendation would be significant tax credits to people below the poverty line, and increased taxes to the wealthy.
The biggest obstacle facing the abolishment of minimum wage is employee exploitation. If employment was a perfect market, there would be no problems, but simple is not. People are not perfectly mobile, information is not perfect, and firms can excerpt market power. Market power is a big problem in places where many people depends on certain firms to provide employment. This was quite typical back in the coal mining days with factory towns, where the factor was basically a monopsonist of all labor. This would allow them to exploit labor by paying them unjustifiably low wages. So, clearly, some former of regulation is important. Not even minimum wage solves this problem, since there can still be particularly high risk jobs that warrant a higher wage, but monopsonist firms just pay the minimum wage.
Hopefully, everyone that read this can understand the basic argument for why minimum wage is hurting the country. And, if I were to perchance convince someone not to vote for Granholm in the coming election I will have considered this post to be a smashing success. 
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