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Economics of Minimum Wages and Rent Controls"Data Analysis" Chapter

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Supply and Demand

The graph shows that the equilibrium point is where P=20. At this point, the supply is 40, and the demand is also 40. Demand equals zero when the price hits 30. Supply hits zero when the price is zero.

The consumers in Prescott are not well-served by the price ceiling. The problem is that the ceiling is below the equilibrium level. At this level, the supply is 2(16) = 32 and the demand is 120 -- (4)(16) = 56. This means that there is much more demand at this level for housing than would be available. Consumers are not served when the market is out of equilibrium. There is a deadweight loss associated with the price ceiling, reflecting the shortfall in supply, and consequently the number of consumers that cannot find housing.

Consumers are also worse off because landlords are not maintaining their apartments. Economically, what is occurring is that the landlords are trying to cut costs, in an attempt to increase supply to meet demand. The problem with this is that the supply is substandard. Many of the consumers receiving this substandard housing would actually be in the market for better housing, in that they could pay more and would pay more if it were possible to do so. The landlords are cutting costs to shift the demand curve by making more properties profitable at the ceiling, but ultimately this is delivering a lower standard of rental to consumers than they would otherwise have, if the cap did not exist.

4) I was not aware there were houses in Manhattan. Must be talking about Manhattan, KS. Of course, owners of rental houses would favor a policy that places a cap on apartment rents but not on house rents. What this policy would do is drive some demand away from apartments, towards housing. When the demand for housing increases, and the landlords are free to charge whatever they want, their profits will increase in the short run.

In the long-run, the ability of the market to move back towards equilibrium will reflect in the ability of the market to increase the supply of houses. In Manhattan, NY, that would be very difficult, and it would be difficult to bring this market into long-term equilibrium by adding supply. Rather, prices would increase, driving down demand. In Manhattan, KS, where new houses can be built, new supply would eventually enter the market, driving down prices to bring about a new equilibrium point. House rental owners who benefit in the short-run would only benefit until the new supply reaches the market.

Part 2. There has been scholarly study on the concept of minimum wages for seemingly forever in economic circles. George Stigler argued in 1946 that the even if the minimum wage helped somewhat in alleviating poverty, it was inefficient because it resulted in misallocation of resources. The minimum wage was re-introduced at that time, and as a result there has been decades' worth of data that can allow for a proper analysis of minimum wage effects. Meta-analysis from the early 1980s showed that through forty years, the minimum wage reduced teenage employment, and that group was the one that lost the most employment as a result of minimum wage laws, presumably because they are the most likely to work for minimum wage (Brown, Gilroy & Kohen, 1982). More recent papers have studied the effect of minimum wages on everything from the food safety scores of restaurants to infant birth weight, highlighting how much more refined the arguments have become. Sources with a free market bent typically show that minimum wages deliver deadweight loss and lower employment; source with a labor bent often do not have such findings.

The basic economic theory with respect to minimum wage is that it sets a floor for wages. That should, in theory, reduce the supply of jobs. Every job in society has a certain economic value. If the cost of that job is lower than the minimum wage, then a company will not hire for that job -- the job will not exist. For workers, if there are fewer jobs in society than there otherwise would be, there should be more workers who are unemployed than otherwise would be. Perfect economic efficiency should result in everybody having a job.

This is, of course, not how labor markets work. There is little controversy with the idea that there are fewer jobs in society as a result of minimum wage. A minimum wage will bring new demand for jobs as more people are attracted to the labor force by the promise of making enough money to live on, but fewer jobs will be available because the minimum wage makes some jobs uneconomical.

Studies of the minimum wage have sought to address some of the other variables at play in labor markets; they are much more complex than the basic arguments about aggregate supply and demand can account for. For one, not all labor is created equal, even for jobs at the lowest levels. The same can be said for jobs. A key difference is with respect to mobility. There are costs associated with labor mobility -- moving to follow jobs. And labor mobility is typically restricted to a single country. Cost of living influences the minimum wage question as well. Even if someone was willing to move from rural Kentucky to Seattle for a higher minimum wage, they might not enjoy a better standard of living because the cost of living is so much higher in Seattle. This is a significant reason to criticise the idea of a national minimum wage, because that creates a tremendous amount of deadweight loss in areas that have a low cost of living.

Another issue today is that jobs can be outsourced, either to other countries or to technology. Workers cannot usually follow their jobs to another country, and they certainly cannot undercut the cost of technology. In essence, the supply of jobs is determined by other forces besides the cost of labor. If there was no minimum wage in the U.S. at all, the cost of living dictates that people must earn a certain amount. There is no point to working if one cannot feed and house oneself on the fruits of that labor. This is how it works in the Third World -- people find whatever way they can to get by if they cannot make enough by working. The Third World actually highlights another issue -- the supply of labor is not strictly dictated by the wages on offer. Birth rates matter, and people do not produce children (future labor) on the basis of rational economic analysis about the future earning power of their offspring. Once somebody is an adult, they can make a decision about whether or not to participate in the labor force, but ultimately they need to eat and house themselves somehow, regardless of whether or not the economy has jobs, or a minimum wage.

So there are some rather important reasons as to why labor markets are unique. The simple economic arguments made for commodities do not apply as neatly to labor markets as they do to most things. Labor (people) are not produced in line with economic analysis the same way rental housing would be (to use the example in Part 1). Even if they were, labor is not fully mobile -- immigration between countries is controlled, and there are often high transaction costs associated with intranational movement of labor -- costs associated with moving, losing support networks, etc. can be high. Jobs are more easily transferred across borders to chase lower wages, and jobs can be lost to technology or lower wage countries regardless of the presence of a minimum wage. This is not to speak of social assistance, which effectively sets a floor for wages even in the absence of an official minimum wage -- you cannot pay somebody less money to work than they get paid to do nothing.

The base analysis of Stigler, and the subsequent years of data, all came from an era before free trade, and before outsourcing and technology had the influence on labor markets that they do today. This is why much analysis focuses on jobs that have not been outsourced yet, such as fast food jobs. Minimum wages have consistently been shown to reduce employment. Companies hire fewer people when wages are higher, because those higher variable costs reduce the contribution to fixed costs for business. If the population remained steady, more people would be drawn into the workforce, only to find fewer jobs.

Raising the minimum wage should reduce the number of jobs in an economy. If it does not, then the increased cost will be passed along to consumers, who will have less disposable money or otherwise reduce consumption as a result. So either directly or indirectly, there should be a reduction in employment as the result of increasing the minimum wage. Companies that rely on minimum wage workers often… [END OF PREVIEW]

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