Page 171 - Krugmans Economics for AP Text Book_Neat

occurs when the wage rate is, for some reason, persistently above W E . Several factors can lead to a
wage rate in excess of W E , the most important being minimum wages, labor unions, effi-
ciency wages, and the side effects of government policies.
Minimum Wages As explained in Module 8, a minimum wage is a government-
mandated floor on the price of labor. In the United States, the national minimum wage
in 2009 was $7.25 an hour. For many American workers, the minimum wage is irrelevant;
the market equilibrium wage for these workers is well above this price floor. But for less
skilled workers, the minimum wage may be binding—it affects the wages that people are
actually paid and can lead to structural unemployment. In countries that have higher Section 3 Measurement of Economic Performance
minimum wages, the range of workers for whom the minimum wage is binding is larger.
Figure 13.2 shows the effect of a binding minimum wage. In this market, there is a
legal floor on wages, W F , which is above the equilibrium wage rate, W E . This leads to a
persistent surplus in the labor market: the quantity of labor supplied, Q S , is larger than
the quantity demanded, Q D . In other words, more people want to work than can find
jobs at the minimum wage, leading to structural unemployment.
Given that minimum wages—that is, binding minimum wages—generally lead
to structural unemployment, you might wonder why governments impose them. The
rationale is to help ensure that people who work can earn enough income to afford at
least a minimally comfortable lifestyle. However, this may come at a cost, because it
may eliminate employment opportunities for some workers who would have willingly
worked for lower wages. As illustrated in Figure 13.2, not only are there more sellers of
labor than there are buyers, but there are also fewer people working at a minimum
wage (Q D ) than there would have been with no minimum wage at all (Q E ).
Although economists broadly agree that a high minimum wage has the employment-
reducing effects shown in Figure 13.2, there is some question about whether this is a
good description of how the minimum wage actually works in the United States. The
minimum wage in the United States is quite low compared with that in other wealthy
countries. For three decades, from the 1970s to the mid-2000s, the U.S. minimum wage
was so low that it was not binding for the vast majority of workers. In addition, some re-
searchers have produced evidence that increases in the minimum wage actually lead to
higher employment when, as was the case in the United States at one time, the mini-
mum wage is low compared to average wages. They argue that firms that employ low -
skilled workers sometimes restrict their hiring in order to keep wages low and that, as a
result, the minimum wage can sometimes be increased without any loss of jobs. Most
economists, however, agree that a sufficiently high minimum
wage does lead to structural unemployment.
Labor Unions The actions of labor unions can have effects similar
to those of minimum wages, leading to structural unemployment.
By bargaining collectively for all of a firm’s workers, unions can
often win higher wages from employers than workers would have
obtained by bargaining individually. This process, known as collec-
tive bargaining, is intended to tip the scales of bargaining power
more toward workers and away from employers. Labor unions ex-
ercise bargaining power by threatening firms with a labor strike, a
collective refusal to work. The threat of a strike can have very seri-
ous consequences for firms that have difficulty replacing striking
workers. In such cases, workers acting collectively can exercise
more power than they could if they acted individually.
When workers have greater bargaining power, they tend to de- Bill Pugliano/Stringer/Getty Images
mand and receive higher wages. Unions also bargain over bene-
fits, such as health care and pensions, which we can think of as
additional wages. Indeed, economists who study the effects of
unions on wages find that unionized workers earn higher wages Members of the United Auto Workers
and more generous benefits than non -union workers with similar skills. The result of (UAW) union march on a picket line during
these increased wages can be the same as the result of a minimum wage: labor unions a strike to protest unfair labor practices.

module 13 The Causes and Categories of Unemployment 129