Supply and demand Research Paper

In this year’s State of the Union Address to Congress, President Obama recommended raising the minimum wage to benefit workers who cannot support themselves and their families with their current salaries. The articles, Why We Need to Raise the Minimum Wage and Why We Shouldn’t Raise the Minimum Wage tell us that there were some controversies in raising the minimum wage. As an economics major, I believe it is a bad idea to raise the minimum wage because it creates more unemployment, and it will reduce entry-level jobs. Since increasing minimum wage is not the solution to the poor people, the government should rather increase the earned income tax credit than minimum wage.

In the article Why We Need to Raise the Minimum Wage by Andy Stern and Carl Camden, the authors support raising of minimum wage. They argue that raising the minimum wage could reward hardworking Americans by providing basic needs such as basic medical insurance and living in secure housing. Since the low wages are not enough to get those basic needs, workers are getting paid in cash because they can avoid tax responsibilities. The authors allege that raising the minimum wage will restore dignity and value to low-wage work.

Conversely, in the article Why We Shouldn’t Raise the Minimum Wage, author Kevin A. Hassett and Michael R. Strain argue that raising the minimum wage does not recover from poverty, and it is a dishonest approach to hide the true cost of the government policy. According to the authors only 11.3 percent of workers from the poor would benefit from raising the minimum wage. Many people who live in poverty do not work, and workers who earn the minimum wage are normally not the primary breadwinners in their households.

Hasset and Strain assert that increasing the minimum wage is an insincere approach of the politicians because minimum wage law could provide an opportunity to score political points easily. Even though, expanding the earned income tax credit is much more efficient, the government do not want it because they do not want to use money directly out from treasury.

In the economical perspective, raising the minimum wage is a bad idea because it creates more unemployment and reduces entry-level jobs. From the point of view of basic supply and demand, employers and workers adjust the quantity of supplied labor according to wages until the quantity of labor demanded equals to the quantity of labor supplied, reaching an equilibrium wage. However, the minimum wage policy ignores the market price by setting a price floor higher than the equilibrium wage. According to the law of demand, few employers will be willing to hire workers if the minimum wage is increased, and it will create unemployment.

Moreover, if minimum wage increases there will be fewer entry-level jobs than before because firms will no longer hire unskilled workers at higher cost. Entry-level jobs are good for younger and unskilled workers. Eliminating these jobs makes it difficult for the low skilled and younger workers to find suitable employment. As mentioned in Hasset and Strain’s article raising the minimum wage is not the solution to poverty because workers who earn the minimum wage are generally secondary earners like an elderly parent earning some retirement income, a spouse with a part time job, or they are young people living with their parents. According to the Center on Budget and Policy Priorities, in 2009, expansion of EITC lifted 3.1 million people out of poverty. In conclusion, earned income tax credit will be a more efficient tool than minimum wage policy.