Two things economics gets wrong – Law Journal for Social Justice

By Isaac Behnke

Ever since Adam Smith wrote The Wealth of Nations in 1776 and economics became an area of study and interest worldwide, economists have been certain of two things: Lower supply or higher demand both create higher prices, and when people do what’s in their best interest, society as a whole benefits. But when it comes to wages, neither of these concepts ring true.

An unemployment rate below 4% should mean higher wages for everyone. If excess labor supply  in the United States is the lowest it has ever been, then economics says wages should be the highest they’ve ever been. But any increase in wages for average American workers has been minimal since 1980. Likewise, increasing wages should mean decreasing employment, but study after study shows an increase in minimum wage likely does not impact employment rates.

The cost of housing in the U.S. continues to rise, while wages largely remain stagnant. A minimum wage increase can make housing more affordable for American workers. (Image: RosZie via Pixabay; modified.)

So, what is going on? It’s possible the power imbalance between employers and employees is so great that while supply and demand would naturally bring about one wage—or “price” of labor—employers are able to instead pay a much lower one. But any guesses as to why wages don’t perform the way supply and demand laws suggest they should are just that: guesses. Despite much research on the topic, the answer to this question remains uncertain. What is certain is that higher wages lead to higher retention rates, higher worker performance, and higher employee satisfaction, all at minimal cost, even to small employers.

The cost of living, and especially housing, continues to rise. With the drawbacks to higher wages proven to be mythical, it’s time for employers to raise wages so Americans can keep up, but that does not seem to be occurring naturally, as one might expect. Again, why wages don’t naturally increase as the labor supply (unemployment) runs low is a mystery, but there is an obvious solution: Raise the minimum wage. Especially in areas with a low cost of living, an increase in the minimum wage can make a big difference.

The existence of inflation means that most prices, at least historically, increase by 2-5% each year. Especially after the U.S. saw record-breaking inflation rates of up to 9% over the last three years, an increase in the federal minimum wage is long overdue. Most scholars, including the one referenced above, are still analyzing and advocating for a $15 minimum wage, but even that number is out of date with contemporary prices. As housing prices continue to rise and the U.S. housing crisis continues, the best solution to ease the burden of the average working American is to make housing affordable.

There are two ways to accomplish such a feat: Reduce the price of housing through government mandate or a supply increase, or increase the minimum wage. Increasing the housing supply has proven too difficult, which leaves us with either mandated rent caps or increased wages. Mandating a price cap for rent seems almost un-American on its face—although rent control has a long history of effectiveness in providing housing options to middle- and working-class Americans—and economists argue it’s not the best way. Meanwhile, we are in the midst of the longest period of time since its inception that the federal minimum wage has remained stagnant. It is time, therefore, for a minimum wage increase, and one that actually allows the people who depend on it to live comfortable lives.

Isaac (he/him) is currently a 2L at Arizona State University’s Sandra Day O’Connor College of Law. Prior to law school, he graduated from Missouri State University with a bachelor’s degree in philosophy and economics. Outside of school, Isaac enjoys chess, reading, and spending time outdoors with his wife and friends.

Published by Law Journal for Social Justice at Arizona State University

The Law Journal for Social Justice (“LJSJ”) is the first student-run and student-created online journal at Sandra Day O’Connor College of Law. LJSJ aims to edit, publish, and produce notable works through its online website from legal scholars, practitioners and law students. LJSJ also publishes twice a year, featuring articles that focus on important, novel and controversial areas of law. LJSJ will provide a fresh perspective and propose solutions to cornerstone issues that are often not discussed, which may also have the potential to positively impact local communities.
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