An alternative argument for why increasing the minimum wage can decrease unemployment. Submitted as homework for an Econ MOOC.
Let’s say you hate your job but like getting paid. Because you hate to work, you keep your expenses low. You’ve figured out how to get by on just $174/week, which you get by working 24 hrs/week at the minimum wage of $7.25/hr. (If this seems implausible, then maybe we can assume you are a high school student living with your parents.) Then one day, your pay is suddenly increased to $9/hr as Congress passed a law raising the price floor for labor.
Now, if you work your usual schedule, you can earn $216/week. A nice raise! But you hate to work. So you see the pay raise as a chance to reduce your hours. Now you can make $174 in only 19.3 hrs. That’s four hours and 40 minutes more freedom every week.
It’s also a four hours and 40 minute shift that your employer must cover somehow. If enough other minimum-wage workers are like you, and the higher price floor leads many workers simply to work fewer hours, then companies will need to hire more workers to cover that time, thereby reducing unemployment.
In his classic study The Protestant Ethic and the “Spirit” of Capitalism, the sociologist Max Weber called the phenomenon of using higher wages as an opportunity to work less rather than to increase income “traditionalism.” The idea is that workers get used to a certain standard of living, and they don’t really care if they have a chance to make more money.
Weber studied farm labor in Germany and found that landowners could not motivate workers to harvest more grain by increasing the wage for each acre harvested. According to the classic supply and demand model, an increase in the price of labor ought to increase the supply of it–it ought to make workers want to work more, increasing the amount of grain harvested. But the workers actually worked less, decreasing the land’s yield.
Weber thought traditionalism was irrational, but from an economic standpoint, it isn’t at all. If I value an hour of free time more than I value $9, then I am losing utility every hour I work. (I.e., work is disutility.) I only work because I do, in fact, need some cash to get by in the world, and I can only get it by working. To maximize my total utility, I need to work as little as possible. A higher minimum wage allows me to do that.
Even better: I can move to the woods, work only for myself, and live deliberately.