Wednesday, March 19, 2014

A survey suggests businesses won't reduce staff, maybe slow hiring of new workers BUT raise prices if the minimum wage goes to $10.10. Let me show you how this is possible.

The Wall Street Journal had this graphic based on a recent survey regarding business sentiment towards a potential increase in the Federal minimum wage to $10.10 per hour.

Sixty-one percent of businesses won't cut their existing workforce (Red means NO, Blue means YES), which is good. About 52% say they won't reduce hiring in the future. Not a ringing endorsement going forward, but we will take it. About 63% say they would raise prices.  THAT doesn't sound good.

So, good for low wage workers who have a job. This is easy to quantify. Not so good for low skilled workers not in the labor force now but may/will be in the future. Not so easy (impossible?) to quantify.  Not good for people who purchase goods/services produced from low wage/low skilled labor. This is VERY easy to quantify.

Source: Wall Street Journal
In AP Microeconomics we have a unit called "Factor Markets" in which we use a very simplified model to graphically illustrate the "Profit Maximizing Number of Workers" a firm will hire given the changing market conditions, such as it described in the graphic.  

According to what you will learn below (all the relevant info is embedded in the slides) the ONLY way the conditions above can be met (no cut in workforce and possible reduced hiring) is if PRICES INCREASE.

The highly competitive industries that employ lots of low wage/low skilled workers AND is dealing with a relatively slow economy, this seems very difficult.  

But I am going to go with it and show you how it is possible for everything to work out just as the graphic suggests.  

Let me know if you spot any mistakes in content. Constructive criticism always welcome.

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