One strain of the argument for a higher minimum wage centers on fairness. This can include a desire to redistribute income, or a basic belief that no one should earn a wage too low to afford the necessities of life.
A second major argument is that the labor market is economically inefficient—that employers have some degree of market power, allowing them to pay workers less than they are worth by hiring fewer people. If raising the minimum wage made the labor market more competitive, the argument goes, business owners would sacrifice some profit. But wages, output, and employment would go up, and society overall would be better off (Figure 1).
1
In the classical model of a labor market “monopsony,” an employer with market power dictates employment and wages based upon its own marginal cost of labor rather than market labor supply. This results in fewer jobs and lower wages than in a competitive market (point A). In theory, a minimum wage law could raise wages to the competitive level and reduce the “dead weight loss” to society (point B). However, new research finds these theoretical benefits are small, given that real-world firms vary widely in productivity.
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