Question

Two employers made the following comments about a proposed increase in the federal minimum wage: Dillon Edwards, founder of Parlor Coffee: "[The increase] should definitely be [to] more than $$[\$ 8.75$$ an hour \(] \ldots\) It needs to be at least in double digits." Beth Fahey, owner of Creative Cakes: "If you raise the minimum wage ... I can't raise everybody. If I do, the price of a doughnut is going to be $$\$ 3$$ and nobody's going to buy it." Briefly explain for which employer the marginal revenue product of labor is likely to be greater. Source: Leslie Josephs and Adam Janofsky, "As Minimum Wages Rise, Smaller Firms Get Squeezed," Wall Street Journal, June \(11,\) \(2015 .\)

Short answer

The marginal revenue product of labor is likely to be greater for Dillon Edwards, founder of Parlor Coffee, as suggested by his willingness to support a higher minimum wage. It indicates that he may be achieving higher returns on his labor investment compared to Beth Fahey, owner of Creative Cakes.

Step-by-step solution

Interpreting the Employers' Perspectives

The comments from both employers offers two diverging perspectives. Dillon Edwards, a coffee shop owner, supports an increase in minimum wage, suggesting a high marginal revenue product of labor. Beth Fahey, a bakery owner, opposes it, hinting at a lower marginal revenue product of labor. She is concerned that an increase would result in higher prices for her goods, suggesting her business has a tighter profit margin.

Understanding the Concept of Marginal Revenue Product of Labor

Marginal Revenue Product (MRP) of labor refers to the additional revenue a firm can generate by employing one additional unit of labor. If a unit of labor is generating a higher amount of additional revenue for the firm, it is likely that the firm would be capable of paying higher wages.

Identifying which Employer has Greater MRP of Labor

From the employers' comments, Dillon Edwards appears to have a higher marginal revenue product of labor. His willingness to support an increase in minimum wage suggests that he is seeing high returns from his employees' labor, thus he could afford to pay his employees more. On the other hand, Beth Fahey's concerns about raising wages suggest that the marginal product of her labor force is lower.

Key concepts

Marginal Revenue Product

When we talk about the Marginal Revenue Product (MRP) of labor, we're essentially discussing how much extra income a business earns when they hire one more worker. Imagine you're running a lemonade stand and you hire an extra helper. The money you make because of this new helper is your MRP.

In simpler terms, if adding a new worker brings in a lot of extra money, the MRP is high. For businesses, a higher MRP can justify paying higher wages to attract and keep good workers. This means companies would willingly pay higher wages if the workers significantly boost their profits.

In the given scenario, Dillon Edwards might experience a high MRP because he supports an increase in the minimum wage. This suggests his business benefits greatly from his workers' efforts. In contrast, Beth Fahey feels pressure on profit margins, indicating a lower MRP.

Labor Economics

Labor economics focuses on how workers and businesses interact in the job market. It's like studying the game of supply and demand, but with jobs. This field explores how different factors impact employment, wages, and productivity.

One way to view labor economics is to think about it concerning minimum wages. A rise in minimum wage can bring different responses from employers. Businesses like those owned by Dillon Edwards might welcome such a change if they believe their employees add enough value. Those like Beth Fahey, however, might struggle if their workers don't produce revenue to cover higher wages.

This highlights the dynamic nature of labor economics, where both employee and employer's interests hang in a delicate balance. Changes in labor law or economic conditions can tip this balance significantly.

Employment Effects

Whenever there’s a shift in wage settings, such as raising minimum wages, employment effects are expected. Essentially, how do changes influence the number of jobs available or the way businesses manage their workers?

For an employer like Dillon Edwards, he might view higher wages as manageable, possibly even beneficial due to motivated workers and better productivity. However, for Beth Fahey, raising wages could mean having to cut hours or reduce her workforce to maintain her business's viability.

These effects are central considerations for policymakers. They need to weigh the benefits of increased living standards for workers against the potential downsides, such as job losses or increased prices, as Beth suggests with her concern over doughnut prices.

Wage Setting

Wage setting in any economy involves deciding what the lowest legal wage should be. This is a contentious issue, often balancing worker needs with business capabilities.

Firms that see high MRP might advocate for higher minimum wages since their profit margins can comfortably support them. In contrast, tighter-margin businesses may struggle under these conditions, often needing to make strategic adjustments, like downsizing or automating tasks, to cope financially.

The act of setting wages isn't just about economics, though. It reflects ethical considerations about living standards and financial equity across a workforce. For policymakers, establishing a suitable minimum wage requires understanding these complex layers to set an amount that's fair yet sustainable.