THE MINIMUM WAGE

The job market is like any other; it is primarily dictated by the laws of supply and demand. When supply exceeds demand, then prices naturally go down.

In modern economies, the supply of workers always exceeds the number of available jobs. This situation is intentional. It is called the "natural rate of unemployment," and economists peg the optimal rate at 6 percent. When the actual unemployment rate goes above or below this, the Fed usually contracts or expands the money supply to bring it back in line.

Why would the Fed do this? Because our economy needs a reserve pool of labor to remain flexible and capable of change. This way, there is always a percentage of the work force that is educating or retraining itself. It also allows the market to fill sudden demands of labor. If we were to somehow achieve 100 percent employment, stresses and strains would only begin growing within our economy. The natural rate of unemployment is therefore a cost of doing business, and as such, businesses should pay for it (through unemployment compensation, for instance).

However, a 6 percent unemployment rate has ramifications at the lower end of the work force. Because the number of available workers always exceeds the number of jobs, it is an employer's market. The boss gets to dictate wages, and, of course, these wages are usually as low as possible.

The law of supply and demand in the job market was dramatically illustrated during the "Massachusetts Miracle" of the 80s. Then, unemployment fell to a phenomenally low 2.7 percent. And McDonald's began offering starting wages of $7 an hour to attract workers.

However, at 6 percent unemployment, employers can force entry-level workers to work below the poverty level. Of course, opponents to the minimum wage object to this characterization. They claim that entry-level wages are the result of a mutual agreement between employer and employee. If the worker does not like the wages offered, then he or she can simply look for another job. Better yet, the worker can look for or train for a job that is not entry-level.

Both of these suggested options are flawed. By brute force, a certain percentage of jobs are going to be entry-level -- the only way there can be no bottom to the totem pole is if there is no totem pole at all. So the job market will always have new workers and entry-level jobs; it is completely unavoidable.

Nor does the worker have the option of turning down a low-wage job in favor of searching for a better one. The 6 percent unemployment rate works against this option. Let's work the problem out according to game theory:

The job applicant's options for any single job offer are:

1. Take the minimum wage offer, and have a means of living.
2. Refuse the minimum wage offer, and starve.
3. Attempt to negotiate for a higher wage, which fails because there is another unemployed person willing to take the minimum wage, because is better than nothing.

The employers options for any single job applicant are:

1. Hire this applicant at the minimum wage.
2. Hire this applicant at a higher wage.
3. Refuse to hire this employee at a higher wage, in favor of another unemployed person to whom the minimum wage is better than nothing.

The employer wins this game because he has two best options (#1 and 3) compared to the applicant's one (#1).

The fact that a fortuitous feature of the job market can allow employers to exploit entry-level workers for sub-poverty wages is one of the rationales behind the minimum wage.

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