On Minimum Wages

The minimum wage was devised so as to assist the low-skilled and low-paid members of the workforce by guarantying that there is floor below which the market wage cannot fall. Although it's a well-intentioned policy, it has perverse effects and in fact, it does more damage than good to the people it aims at helping. However, when trying to illustrate the problems of such policies, one is often vilified and socially disparaged. Yet, I will still try to explain 3 issues that arise due to the imposition of minimum wages.

Let us start by considering the general labour market of Figure 1. In such a market the firms demand labour and the workers supply the labour. The demand curve slopes downward since the higher the wage the less workers the firms want to hire on average. Similarly, the higher the wage the more the workers are willing to work.

Figure 1: A general labour market

Suppose that at wage "W*" the number of workers the firm wants to hire equals the number workers that are willing to work and thus the market clears. In this equilibrium, we have "L*" workers hired with each receiving "W*", and most importantly, there is NO unemployment because "L*" workers are willing to work and exactly "L*" workers are working.

If, however, the wage rate "W*" is deemed to be too low,  the government may wish to increase it by imposing a minimum wage. This means that the wage rate must be placed ABOVE the equilibrium wage, otherwise such a policy is pointless. For example, the government may impose a minimum wage of "Wmin". However, at this rate "LS" workers want to work whereas the firms want employ only "LD".  Consequently, only "LD" workers are employed and the rest "Ls - LD"  are considered unemployed since they are willing and able to work but cannot find employment (the economic definition of unemployment).
Surely, the minimum wage benefits those "LD" workers who continue to be employed as they now receive higher wages. However, how about those "L*- LD" workers who lost their job? Will the workers that are still employed concur to transfer part of their wage to reimburse them? Although, total earnings for the workforce as whole could increase due to the minimum wage (if the percentage drop in employment is less in absolute terms than the percentage increase in the wage), the fact remains that now we have unemployed workers.

One may suggest, that the firm should not layoff its workers. However, suppose you are a firm owner and you have determined that a particular job is worth $400 to you and you currently have 1 employee. What would you do if a minimum wage was imposed which raised the wage rate to $500? In fact you have a couple of options; (i) you wait until your employee's contract expires and then you fire him or her (or fire him or her immediately), or, (ii) you continue to pay him or her $400 but now this payment will be "under the table". The first option results to unemployment and the second to underground economy. Both pretty terrible options.

Yet the emergence of unemployment is not the only unfortunate consequence of minimum wages. I find that Milton Friedman was correct to point out that employment is a dynamic game. A worker may start at a low-paying job in order to receive some training and skills which will help him or her in his or her future career path. That is, a low-paying job can help people who where unable to attend a university or a college to put their foot in the door and receive some training which could prove extremely valuable. As a matter of fact, Walmart's store managers are mostly workers who were initially hired for the lowest paid jobs at the company. By raising minimum wage less workers will be able to put their foot in the door. 

In concluding, the policy of minimum wages is counterproductive as it has numerous unintended consequences three of which where stated above; (1) unemployment, (2) underground economy and (3) deprivation of opportunity for training. Moreover, a solid and extremely valid case can be made that one must not meddle with market prices since they provide valuable information about the market.

Figure 2: Subsidizing employment

But, let's ignore this issue for the moment and suppose that we all agree that the wage must be increased to "Wmin". Instead of imposing a minimum wage which will result to unemployment, the government could instead subsidize employment by paying a sum of money to the firms for each worker they employ. This would shift the demand curve outwards in order to cross the supply curve at wage "Wmin" with "Ls" workers employed as seen in the figure on the left. Hence, under the subsidization scheme both wages and employment increase, whereas with the minimum wage only wages increase with employment falling. 

So, if you were the government, which policy would you choose?

About Voting

Elections are right around the corner again. And again we are told that we should not abstain. The reasons provided for this rhetoric are plentiful and familiar. They are also without substance. Some may even propose a return to the compulsory voting; that is, punishing those who abstain either by fines or even imprisonment. In fact, they argue that forcing people to vote will result to election results that more accurately reflect the people´s choice.

This, however, need not be the case. Allowing people to freely choose whether to participate in the elections or not has its pros and cons. On the one hand, a major advantage is that among those who choose to participate in the process, we will have people who really care about the issues and are thus more informed. That is, we eliminate those who are rather indifferent and passive, and are thus more likely to vote randomly  or even worse vote what their peers suggested. In other words, the signal to noise ratio increases.

On the other hand, a major concern is that at the end more polarized than informed voters participate. This is a major concern because polarized voters choose based on emotion and not logic. In such a case introducing randomness (stemming from compulsory voting)  in the process may result to a better result. However, before positing such an argument we should evaluate the level of polarization among such voters. How rigid are they?

Moreover, it might as well be the case that introducing compulsory voting may amplify the polarization among voters and not reduce it. If someone is passive enough to the point where he or she would not otherwise vote, then it is highly likely that she will not get informed about the issues. Consequently, he or she might vote what her polarized peers favor.


As far as the reasons which are provided for why one must vote, I take issue with 3 particular talking points that are frequently invoked.

1) Civic Duty: Many will often simply suggest that it´s someone´s civic duty to participate in the elections by voting. I disagree. Just because you feel overwhelmed with "patriotism" and believe that this is your duty, it does not mean that everybody embraces the same mindset. Please do not project your views onto us. I believe that it´s my civic duty to protect everybody´s opinion and ability to choose freely what they will do. It is likely that everybody has a different interpretation of what their duties are.

Being a member of a society is not like being member of an inclusive club where you have to sign a statement which clearly indicates your duties and responsibilities. When I was born, nobody gave me anything which stated my duties to sign. Please refrain from using such an emotional rhetoric and stop trying to shame someone into voting.

2) Abstaining maintains the status-quo: Another common argument is that failing to vote during elections condones in effect the status-quo and legitimizes corruption of the politicians. So, if you politicians can recognize that you are corrupted, why don´t you just change your behavior?

3) Influence on election result: another point often raised is the fact that abstaining from voting suggests that you cannot influence the result. Let´s check this one out. Suppose we have 4 voters and 3 alternatives to choose from; candidate A, candidate B and neither (denoted by N).  Suppose 2 voters favor A, 1 favors B and the 1 is undecided and considers abstaining.

If the undecided voters abstains then candidate A gets 2/3 of the votes, whereas if the undecided voter does vote then we have 3 possible scenarios:

- Votes for B, in which case A and B get 2/4 of the votes. In this case, the undecided voter has a significant effect on the result.
- Votes for A, in which case  A gets 3/4 of the votes. In this case, the undecided voter simply amplifies the difference, but has no effect on the ordering of preferred candidates.
- Votes for Neither, in which case A gets 2/4 of the votes  and B gets 1/4 of the votes. Again, the undecided voter has no effect on the ordering of preferred candidates.

So, by abstaining the undecided voter affects the result only in the case where she would vote for candidate B if he or she was forced to vote.

Now further suppose that if forced to vote, the undecided voter is equally likely to vote for each alternative. Then forcing such a voter to vote leads to a standstill 1/3 of the time. But since the undecided voter is indifferent such an outcome is inefficient. Allowing her to abstain will improve efficiency in this society as in such case will have a definite winner and the result will more clearly represent the society´s preferences.


With that all  being said, I am going to vote, but I know why. I have a strong preference and I am familiar with the different candidates and their positions on issues that are important to me. I do acknowledge though that the issues that are important to me, could very well be of secondary importance to other voters. Moreover, on the issues that are important to those other voters, the candidates may vary very little in their positions, which may lead to a lot of voters being indifferent. Similarly, it could be the case that people do not want to or do not have the time to get informed about the issues. Quite frankly, I would prefer them abstaining rather than voting randomly.

Finally,it´s wrong to suggest that just because someone abstained, then he or she has no right in criticizing the winner in the future. Just because a voter was indifferent when the election was taking place, this does not mean that this indifference cannot be broken in the future. Similarly, we are supposed to be a democracy and just because someone exercised his or her right to abstain, this does not mean that we should withhold his or her right to free speech until the next election. As a matter of fact, he or she might raise a good point that the rest of us failed to see.