Labor Markets and Minimum Wage: Crash Course Economics #28

Welcome to Crash Course Economics. Today we're discussing labor markets. Unless you're independently wealthy or content with living in your parents' basement, you probably need a job. The process of getting a job and determining its type often boils down to supplying a skill that someone else demands. Consider Cristiano Ronaldo, who earns about $20 million a year playing soccer. While many might agree no one "needs" that much money, his salary is justified by supply and demand. The supply of individuals with world-class soccer skills is low, while the demand for such players is incredibly high. Ronaldo might be willing to play for less, but his high demand means Real Madrid, his employer, values his ability to generate millions in ticket and merchandise sales and help win championships. They determined he was worth $20 million, and he agreed, forming a contract. These principles of supply and demand apply to nearly all labor markets. When an individual seeks a job, such as at a pretzel shop, the roles of buyer and seller are reversed. The individual supplies labor and becomes the seller, while the business owner buys labor and becomes the buyer. Wage negotiation then occurs. The individual might ask for a high wage, but the owner could find others for less. Conversely, the owner might offer a low wage, but the individual could find better pay elsewhere. Ultimately, they agree on a wage that benefits both, an economist's concept of voluntary exchange. The supply of labor depends on the number of qualified people for a job. For example, warming up pretzels doesn't require extensive skills, so the supply of capable workers is high, leading to a relatively low wage. However, the offered wage must cover the worker's opportunity cost, which includes the value of lost free time and potential earnings from other activities. The demand for labor is derived from the demand for the products a business sells. If pretzel demand is high, the shop will need more pretzel makers, increasing demand for workers and potentially driving up wages. Supply and demand explain wage differences across professions. Engineers, for instance, are in high demand due to consumer desire for their products, and their supply is limited by difficult training, resulting in higher wages. Social workers and historians, despite their important work, may earn less because demand is relatively low and supply is relatively high. However, labor market wages don't always reach a competitive equilibrium. Wage discrimination can occur, where individuals are paid less based on characteristics like race, ethnicity, sex, or age, rather than skill. Wages can also be unfairly low in a monopsony, where only one company is hiring, and workers have limited mobility. A prime example is the NCAA, where high-profile college athletes generate millions for their schools but are compensated with scholarships, effectively a low "wage." While some sports allow players to go pro directly, others, like football and basketball, mandate a college period, limiting options. Conversely, wages can be higher than market equilibrium. Employers might offer efficiency wages voluntarily to boost worker productivity and retention. Henry Ford famously doubled assembly line workers' wages in 1914 for this reason, a practice still seen today. Unions also drive up wages through collective bargaining, where worker representatives negotiate with employers and can call strikes if demands aren't met. While historically strong, union membership and influence in the US have declined since the 1950s. Minimum wage laws, a price floor preventing employers from paying below a specific amount, can also affect wages. While directly impacting a small percentage of US workers, an increase in minimum wage can have a ripple effect, raising wages for those just above the minimum, potentially affecting a significant portion of the workforce. The debate over minimum wage is often heated. Classical economists argue against government intervention, claiming minimum wage causes unemployment and harms those it intends to help by deterring hiring of unskilled workers. They contend that instead of earning a minimum wage, unskilled workers earn nothing. Conversely, economists supporting minimum wage argue that real-life labor markets are not perfectly competitive. They believe employers often have the upper hand in wage negotiations, and individual workers lack bargaining power. In this view, minimum wage corrects a market failure, similar to anti-trust laws preventing monopolies from exploiting consumers. They argue it prevents employers from exploiting workers with their power. While economists opposed to minimum wage laws are losing the policy battle globally, with most countries having such laws, there's still disagreement on the optimal minimum wage level and its economic impact. In the US, the federal minimum wage is $7.25 an hour. In 2014, 600 economists, including Nobel laureates, advocated for an increase to $10.10, believing it would slightly benefit the economy by increasing worker spending and stimulating employment. However, some of these same economists were hesitant about a $15 minimum wage, arguing that while it might make sense in expensive cities, it could negatively impact employment in lower-income areas. Empirical studies on minimum wage effects have yielded mixed results. A 1992 study by economists David Card and Alan Krueger examined New Jersey's minimum wage increase from $4.25 to $5.05, while Pennsylvania maintained $4.25. They found that employment in New Jersey's fast-food industry actually increased, rather than leading to job losses. However, other studies suggest minimum wage increases do lead to unemployment. A University of Chicago survey of economists found a slight majority believed raising the minimum wage to nine dollars an hour would make it harder for poor people to find work, but a similar majority also thought the benefits to those who found jobs at that wage would outweigh the negative employment effect. While few economists believe a higher minimum wage will end poverty, some argue it could reduce it. Poverty-fighting policies should also focus on providing education and skills, which are highly valued in the labor market due to their short supply and high demand, commanding higher wages.