Micro Economic Theory

Posted on: January 24, 2019 at 15:54:56 CT

Micro economic theory holds that as additional units of an input are employed by a firm, the marginal revenue generated by each additional unit employed declines.

It also holds that a firm employs additional units of an input until the marginal revenue generated by the last unit employed is equal to the marginal cost of employing the unit.

Labor/workers are an input. If the wage rate is $15.00 per hour, Micro economic theory holds that a firm hires more workers to perform a particular job until the cost of the hourly wage paid the last worker and the value of the additional output produced by that worker during that hour are equal.

If the minimum wage is $15.00 per hour, a firm adds works as long as the value of what they produce is more than $15.00 an hour and when the value of the additional output from an hour falls to $15.00 an hour, it stops employing additional workers.

While there are many "fairness arguments" for a minimum wage, the impact of a minimum wage is to cause firms to lay off, to not employ workers who produce less value than the minimum wage.

Having a minimum wage that allows workers to "survive" is good unless there are no jobs because the workers don't produce that much additional value for the firm. I.e. the fast food industry won't hire kids to work if the cost is $15.00 per hour and the kid produces only $12.00 per hour of additional revenue.