Consumption Rules

The Fair Labor Standards Act of 1938 gave the federal government the authority to enact minimum wage laws. The current federal minimum wage is $5.15 per hour. Individual states have the power to pass legislation dictating the minimum wage within that state, but if the two wages come into conflict, the higher of the two standards applies. There are seventeen states whose minimum wage is higher than that of the federal limit, including all three of the far-western states. California has their minimum wage set at $6.75/hr. state-wide, Oregon’s is at $7.50, and Washington’s minimum wage worker gets paid $7.63 per hour. (Department of Labor) While there are definitely other factors involved, it is interesting to note the correlation between these states’ minimum wage and their unemployment rate. I realize that there is bias in the selection of these states’ statistics, and that it may not hold true for the entire nation, but I show the correlation only as evidence that, perhaps, some minimum wage levels may be set above the equilibrium level.

Using statistics obtained from the Bureau of Labor Statistics and comparing the last few years, we can compare these states’ unemployment rates to the national average in an admittedly unscientific manner. In January of 2000, California’s unemployment rate stood at 4.9%, while Oregon and Washington’s were 5.1% and 4.9% respectively. The national average for this same time was 4.0%. In January of 2001, California had a 4.6% unemployment rate, Oregon had a 4.8% rate, and Washington’s was at 5.6%. The national average for January of 2001 was 4.0%. In 2002, 2003 and 2004, California’s rate of unemployment from 6.5% to 6.8% and then to 6.2%. During that same time, Oregon’s was at 8.3%, then 7.9% and then 7.7%, while Washington’s was 7.5%, 7.3%, and then 6.5%. The national average for the first months of the years 2002-2004 inclusive were 5.6%, 5.8% and 5.6%. Because of government’s interference in the free-flow of an otherwise efficiently allocated system, shortages are incurred and the resources are not distributed to all that would benefit. The minimum wages in other states make the comparison more clear. In Kansas for example, a state without a minimum wage above the national standard, the unemployment rates for the month of January in the years 2000-2004 inclusive were 3.0%, 4.1%, 5.0%, 5.3%, and 4.7% respectively – consistently below the national average.

In the absence of other variables, a price floor set above the equilibrium price will cause a shortage of supply. In other words, if we set a minimum wage above what the market demands, you create more demand for labor than there are jobs - you create unemployment. So it comes down to the question - is it better that more people work for less pay, or less people work for more pay? Remember, also, that by raising the minimum wage you’re not creating extra competition for the $100/hr. jobs - it’s the marginal workers that get pushed out of their job: the very people who are supposed to be helped by the minimum wage. Because of friction in the economy (the time/effort it takes to move from one job to another) there will always be some level of unemployment. In the United States that number seems to be somewhere around 5% (As of January ‘06 it was at 4.7% - despite what the doomsayers are saying, it’s approaching a point that is unsustainable because it is too low. As much as everyone hates to admit it, the economy is doing pretty well) [(Historical Unemployment rates from economagic.com)]

Is there enough of a need to justify setting a minimum wage? Could you make the argument that a minimum wage is unneccesary? If you think a mimum wage is necessary, what is the optimal minimum wage level? Do you agree with the evidence that some states’ minimum wages may be set too high?

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