Minimum Wage Regulation Analysis in Competitive Markets
The impact of minimum wage regulations on the labor market, efficiency, and other related markets. Understand how minimum wage affects different worker groups and conduct welfare analysis to assess efficiency in the context of competitive markets.
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Alex Anas presentation. 01.28.2025 Minimum wage regulation in competitive markets Minimum wage regulation in competitive markets 1. How minimum wage affects the labor market 2. Efficiency: welfare analysis of minimum wage 3. Effects of minimum wage regulation on other markets 4. The substitution of capital for labor (machines, robots, AI)
1. How minimum wage regulation 1. How minimum wage regulation affect the labor market? affect the labor market?
Wage ($/hour) Demand for labor by firms Supply of labor by workers WL Employed labor Unemployed labor looking for work (Excess supply) We Equilibrium wage Quantity of labor (hours) Equilibrium labor quantity QL Qe
Wage ($/hour) Demand for labor by firms Supply of labor by workers Newly looking for work Previously employed now unemployed WL Employed labor Unemployed labor looking for work (Excess supply) We Equilibrium wage Quantity of labor (hours) Equilibrium labor quantity QL Qe
Questions that arise about worker groups Questions that arise about worker groups There are three groups of affected workers: 1. Those who continue to work but now at a higher wage: These are the most efficient workers retained by the employers. 2. Those who are laid off because the wage increased: These are the most inefficient workers of the employers. 3. Those who begin to look for work because the wage increased but cannot find work: These look for work unsuccessfully and incure search costs.
2. Efficiency: welfare analysis of minimum wage
BEFORE MINIMUM WAGE REGULATION Wage ($/hour) Demand for labor by firms Supply of labor by workers The height of the demand line is the maximum a firm would pay for one more hour of labor Surplus of the firms WELFARE = Surplus of the firms + Surplus of the workers We Surplus of the workers Equilibrium wage The height of the supply line is the lowest wage a worker would accept for one more hour of work Quantity of labor (hours) Equilibrium labor quantity Qe
AFTER MINIMUM WAGE REGULATION -- 1 Wage ($/hour) Demand for labor by firms Supply of labor by workers = surplus of firms WL = surplus of employed We Equilibrium wage = deadweight loss Quantity of labor (hours) Equilibrium labor quantity QL Qe
AFTER MINIMUM WAGE REGULATION -- 2 Wage ($/hour) Demand for labor by firms Supply of labor by workers Transfer from firms to employed workers Loss to firms from laying off workers = surplus of firms WL = surplus of employed We Equilibrium wage = deadweight loss Loss to laid off workers Quantity of labor (hours) Equilibrium labor quantity QL Qe
WHEN LABOR SUPPLY IS PERFECTLY ELASTIC Wage ($/hour) Demand for labor by firms Surplus of firms Surplus of workers Loss to firms from laying off workers WL Supply of labor by workers We Equilibrium wage Quantity of labor (hours) Equilibrium labor quantity QL Qe
3. Effects of minimum wage regulation on other markets
The minimum wage increases the cost of labor. Therefore, the price of output will increase too. If capital (machines) and labor are substitutes in production, the higher wage cost will cause the demand for capital to increase so the price of capital will increase.
Supply of output AFTER minimum wage OUTPUT MARKET PRICE ($/unit) Demand for output Supply of output BEFORE minimum wage Pe Equilibrium price OUTPUT (units) Equilibrium output quantity Qe
4. The substitution of capital for labor (machines, robots, AI)
Demand for capital (machines, robots, AI) AFTER min. wage PRICE OF CAPITAL ($/unit) Supply of capital Pe Equilibrium price CAPITAL (units) Equilibrium capital quantity Qe
People versus machines: The impact of minimum wages on automatable Jobs. Grace Lordan and David Neumark, Labour Economics, 2018 A b s t r a c t We study the effect of minimum wage increases on employment in automatable jobs jobs in which employers may find it easier to substitute machines for people focusing on low-skilled workers for whom such substitution may be spurred by minimum wage increases. Based on CPS data from 1980 to 2015, we find that increasing the minimum wage decreases significantly the share of automatable employment held by low-skilled workers, and increases the likelihood that low-skilled workers in automatable jobs become nonemployed or employed in worse jobs. The average effects mask significant heterogeneity by industry and demographic group, including substantive adverse effects for older, low-skilled workers in manufacturing. We also find some evidence that the same changes improve job opportunities for higher-skilled workers. The findings imply that groups often ignored in the minimum wage literature are in fact quite vulnerable to employment changes and job loss because of automation following a minimum wage increase.
