Unemployment, minimum wage, and the law of demand

Approximately the third lecture of every semester is the topic of the law of demand.  This idea is a crucial law in understanding economic theory and the world around us.  The law of demand for those of you that need a refresher is that the price and quantity of a product are inversely related, ceteris paribus.  That means demand curves slope downward.  This idea is held with such certainty that Nobel Laureate George Stigler once quipped that any economist who could identify an upward sloping demand curve would be “assured of immortality, professionally speaking, and rapid promotion”*


My students often find this idea to be intuitive as most people do, if the price of a product increases we purchase less of it.  However, there are clearly some people who still fail to understand this basic concept.  The Wall Street Journal has a column on The Jobless Summer for teenagers.  The article points out that the increase in the minimum wage in 2009 is major contributor to that situation.  The minimum wage was raised creating a price floor and surplus i.e. unemployment.  The wage rate was increased and employers purchase less labor, in other words the law of demand at work.

The article also notes that the individuals who work at the Center for American Progress do not believe in the law of demand.  "The Center for American Progress ... recently recommended another increase to $8.25 an hour. Though the U.S. unemployment rate is 9.1%, the thinkers assert that a rising wage would 'stimulate economic growth to the tune of 50,000 new jobs.' So if the government orders employers to pay more to hire workers when they're already not hiring, they'll somehow hire more workers."

Raising the wage to increase employment seems like a similar argument that the stimulus was just not large enough.  Both points seem to want to ignore the law of demand and the role of prices.

*Stigler, George J. The Theory of Price. 3d ed. New York: Macmillan, 1966 page 24.