Life and Economics

14 November 2005 at 5:43 pm

(If economics isn’t quite your thing, then don’t bother reading this post.)

Several of the perpetual debates in economics concern the effects minimum wage laws have on society, both in theory and in reality. If one assumes that a minimum wage is a “good” thing to have (for any reason), then the question that logically follows is the value to set it at. For this discussion, I’m not terribly concerned with the rate it *should* be set at; instead, i’m more interested on how societal trends and economic policy have influenced each other in the past.

First, take a look at the graph of the real minimum wage from 1950 to 2004. Since the minimum wage isn’t indexed to inflation, it spikes whenever an increase in the minimum wage occurs. Smoothing out the bumps, one can pick up the longer-range trends:

  • A steep increase in the real minimum wage from 1955 to 1968;
  • A series of increases to keep up with high inflation in the mid-1970s;
  • A dramatic decrease during the late 1970s and early 1980s;
  • A (broadly) stable real minimum wage through the present.

Any number of reasons can be given for why a $7.00/hr minimum wage does not exist today, but one incredibly obvious reason that never seems to be discussed is the fact that the workforce participation rate have increased relative to the overall working-age population, driven primarily by the entry of women into the workforce between 1950 and the present. (I really wish I had more detailed workforce participation statistics describing when the bulk of this increase occured, but I’d be willing to guess that the years between 1965 and 1980 saw the greatest increases.) With that information, all one has to do is draw two supply and demand graphs to understand why the real minimum wage is significantly lower now than it was in 1970.

(In case you’re wondering, I’m fully aware that correlation does not imply causation, that this is an ultra-simplistic explanation for an economic trend, etc.) However, it’s a useful example of how the decisions we make can change society in unanticipated ways.

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