Grading criteria and work cited guidelines

Microeconomics

In 2014, Seattle instituted a minimum wage of $15, which will be phased in over the coming couple of years (Burtless, 2014). Other cities, including Chicago and Philadelphia, are aiming to follow suit with sharp increases in their own minimum wages (Dardick & Garcia, 2014). These increases are expected to increase the standard of living among the working poor in these jurisdictions. While popular ideas with low-income workers, these plans have generally not been met with much enthusiasm by business groups (Worstall, 2014). These policies can be examined from both a macroeconomic perspective (effects on unemployment, GDP and poverty rates) and from a microeconomic perspective. This paper will focus on the latter.

The first concept is basic supply and demand. A simplistic version of supply and demand is typically utilized to argue against a $15 minimum wage. In this understanding, when the cost of labor increases, demand for labor decreases. This immediately creates concerns that employers affected in the city will be at competitive disadvantage to those in nearby suburbs with lower costs of labor. The result will be that such employers will move, thereby creating a decline in employment, or will cut back their operations, in either case creating a decrease in demand (Burtless, 2014).

The problem with this argument is that it is only half the story. If today a city is in a state of equilibrium with labor demand and supply, but tomorrow the city institutes a sharply higher minimum wage, it is true that demand will decrease. But supply will increase. Low-income workers will all want to work in the city, where they can earn the higher minimum wage. The jobs lost aren't market failure, they are a shift towards a new equilibrium point.

This is where it gets interesting. Labor moves more easily than industry. Thus, workers can come into the suburbs to seek out the high wage jobs, but in many cases employers cannot relocate. There are high costs associated with relocation. Many affected workers are in service industry jobs -- fast food, hotels, etc. Those are jobs that cannot be relocated, because the supply has to locate where the demand is. The hotels in downtown Seattle are not going to pack up for Spokane just because the minimum wage went up. So the demand is much stickier than the supply. The net effect is that many businesses will have to maintain their employment levels, but will have a better selection of workers from which to choose. They can skim the cream of workers in their field, because all workers in the metro area will want to work for the $15/hr wage.

In some businesses, the higher costs will need to be passed along to the customers. In wealthier neighborhoods, the residents can absorb the costs, especially since the inflationary effects of the wage policy are going to be phased in over the course of several years. Price elasticity of demand for basic goods is fairly low -- at least for minor price increases -- among wealthy residents. At worst, there will be some degree of wealth transfer from the wealthier residents to the less wealthy. In poorer neighborhoods, prices will also have to increase, but residents will earn more, and therefore have greater spending power, so while they have much higher price elasticity of demand, the increased income will reduce that somewhat.

Competition is another element of this market. As noted, many businesses that hire low-income workers cannot easily relocate. In manufacturing operations, there are significant costs associated with moving that might dissuade companies from moving, unless the higher wages make the company uncompetitive entirely. In such an event, the business will either need to find a way to increase its pricing power, or may be forced to close. In other instances, for example in light industries and office work, it will be easier to move. There are two factors that come into play here. First is that relocation to the suburbs will mean the company gets a lower quality of worker, wherein productivity losses will offset some of the wage savings. The second is while some suburbs may attempt to attract businesses with their lower minimum wages, workers will tend to pursue equilibrium wages throughout the region. These laws are popular with voters in many places, and over time it is expected that the minimum wage in many suburbs will follow that of the region. Companies will have to pay more, even if the official minimum wage does not change, in order to attract workers. The supply side has more power than its typically given credit here -- a city like Seattle will attract more than its share of good workers, knowing that wages are higher there, and this will harm the ability of businesses in the suburbs to do the same. They will get the worst workers, the ones who cannot get hired in the city.