Economic Law vs the Will of Gov.

Just came across an article from FEE (Foundation for Economic Freedom) entitled: The Minimum Wage Hurt the Young and Low-Skilled almost as Much as the Recession

In it, they describe a recent study that points to evidence that the young and low-skilled are the most likely to be negatively affected by minimum wage increases. I have not yet looked into the actual data used to come to this conclusion but actually, it’s something that I’ve concluded for a long time now, simply through logical inference. But thinking about this more as I write this post, I’ve actually had a small epiphany with regard to the law of supply and demand.

This is a perfect example of why the law of supply and demand is called a law. Often times when we talk about this we talk about it in terms of the cause and effect of changes to either supply or demand to prices, in particular within the context of a free market. Something I’ve not been as familiar with is what the effect is when changes to price itself happen as a result of government interference, that is, forcing a price to be higher than the market price (i.e. the emergent price that occurs when supply and demand changes).

Thinking about this reminded me of a talk by Milton Friedman where he explained how unions manage to raise the labor price of their members. Within the constraints of supply and demand, there are just a few ways to do this. One way is to reduce the supply of labor. All things being equal, reducing the supply will increase the value, thereby increasing the price. Unions can reduce the supply of labor in a couple of ways: slowing the growth of the labor force, or just by promoting policies that make it more difficult for people to enter the workforce.

However, affecting supply is just one lever to affect the price. But what happens when price itself is the lever, whereby government interference, the price is raised? Just because it’s the Will of “Gov” doesn’t change the law of supply and demand, that’s why it’s called a law. So if you force the price to be above the market price, the market will only go back into balance when either supply goes down or demand goes up, or some combination of the two. The epiphany I had was that the reason why young and low-skilled workers have a harder time finding jobs as a result of minimum wage hikes, is not simply that higher prices of labor means businesses will hire less, but that the supply had to be reduced, putting the higher price back into equilibrium. The effect of a higher minimum-wage priced the young and low-skilled workers out of the market, reducing the supply, therefore raising the value of the remaining older, higher-skilled workers.


Thanks for reading. I’m always learning, so if you have anything to correct me on, I’m open to any feedback.

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