We recently asked SYM’s Chief Investment Officer Andy Popenfoose this question. This is a paraphrase of what he shared. Catch his exact words in the video above.
The Classic Set up of Two Curves
Early labor economics curriculum teaches us about two curves, the supply of labor and the demand of labor. These two curves show how many workers and employers are willing to work and pay for different wages. Here is an example of extremes to illustrate the point. If the wage is very high, say $1,000 an hour, many workers would want to work, but few employers would be able to afford them. Only in the rarest of cases could an employer justify such a high wage. On the other hand, if the wage is very low, like $1 an hour, many employers would want to hire workers, but few workers would be interested in working. They may decide that there is more reward in enjoying their leisure time than working for such low pay.
The Equilibrium Wage vs. Minimum Wage
The supply and demand curves cross at a point where the wage is neither too high nor too low. This is called the equilibrium wage, and it is determined by market forces.
A minimum wage is a policy that sets a lower limit on how much workers can be paid. If the minimum wage is below the equilibrium wage, it has no effect on the market. But if it is above the equilibrium wage, it creates a gap between the supply and demand of labor. More workers would want to work at the higher wage, but fewer employers would want to hire them.
Your Opinion
Andy throws out some questions to consider, leaving room for opinion regarding the risks/rewards of increasing the minimum wage, its effect on the unemployment rate, and how more dollars in pockets could have a stimulative effect on the economy.
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