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› Black markets › admin › Comments Off ›
When price controls are imposed, exchanges at prices outside of the range set by the government are illegal. Governments may also make it entirely illegal to buy and sell certain products. This is the case with drugs like marijuana and cocaine in the United States. Similarly, prostitution is illegal in all states except Nevada. However, controlling prices and making a good or service illegal doesn’t eliminate market forces. When demand is strong and gains from trade can be had, markets will develop and exchanges will occur in spite of the restrictions. People will also engage in illegal exchanges in order to evade taxes. For example, the $3.39 per-pack cigarette tax in New York City has made cigarette smuggling in that city a thriving business.
Markets that operate outside the legal system are called black markets. How do black markets work? Can markets function without the protection of the law? As in other markets, supply and demand will determine prices in black markets, too. However, because black markets operate outside the official legal structure, enforcement of contracts and the dependability of quality will be less certain. Furthermore, participation in black markets involves greater risk, particularly for suppliers. Prices in these markets will have to be higher than they otherwise would be to compensate suppliers for the risks they are taking – the threat of arrest, possibility of a fine or prison sentence, and so on. Perhaps most important, in black markets there are no legal channels for the peaceful settlement of disputes. When a buyer or seller fails to deliver, it is the other party who must try to enforce the agreement, usually through the use or threat of physical force.
Compared to normal markets, black markets are characterized by a higher incidence of defective products, higher profit rates C for those who do not get caught), and more violence. The incidence of phony tickets purchased from street dealers selling them at illegal prices, and deaths caused by toxic, illicit drugs, are a reflection of the high presence of defective goods in these markets. Certainly the expensive clothes and automobiles of many drug dealers suggest that monetary profits are high in black-markets. Evidence of violence as a means of settling disputes arising from black market transactions is widespread. Crime statistics in urban areas show that a high percentage of the violent crimes, including murder, are associated with illegal trades gone bad and competition among dealers in the illegal drug market.
The prohibition of alcohol in the United States from 1920 to 1933 vividly illustrates how violence, deception, and fraud plague markets that operate outside the law. When the production and sale of alcohol was illegal during the Prohibition era, gangsters dominated the alcohol trade, and the murder rate soared to record highs. There were also problems with product quality (tainted or highly toxic mixtures, for example) similar to the ones present in modern-day illegal-drug markets. When Prohibition was repealed and the market for alcoholic beverages began operating once again within the legal framework, these harmful secondary effects disappeared.
The operation of black markets highlights a point often taken for granted: a legal system that provides for secure private-property rights, contract enforcement, and access to an unbiased court system for settling disputes is vitally important for the smooth operation of markets. Markets will exist in any environment, but they can be counted on to function efficiently only when property rights are secure and contracts are enforced in an evenhanded manner.
The analysis of black markets also provides insights into the economies of Russia, Ukraine, and other parts of the former Soviet Union. Following the collapse of communism, the legal systems in these areas reflected the prior socialist nature of these economies. Both the protection of private property and the enforcement of contracts between private parties were highly uncertain. People with political connections were of- ten able to escape their contractual responsibilities and obtain favorable rulings from legal and regulatory authorities. As a result, markets in these countries operated much like black markets. Fraud and deception were commonplace, and the incidence of violence related to business dealings was widespread. A market economy – like any other – does not work well in such an environment. Many foreign businesspeople who were initially attracted to markets in these countries soon began packing their bags and returning home. Financial capital fled, investment shrank, and these economies performed poorly. During the last few years, there has been some improvement in the legal environment, but the enforcement of contracts and conduct of business activities in the former Soviet Union still involve considerable risk. Without sound legal systems, these countries will be unable to reap the full benefits of a market economy.
Tags: Black markets, Crisis, economy, financial markets
› Minimum wage › admin › Comments Off ›
In 1938 Congress passed the Fair Labor Standards Act, which mandated a national minimum wage of 25 cents per hour. During the past 65 years, the minimum wage has been increased many times. The current federal minimum wage is $5.15 per hour, although some states have their own higher minimum-wage rates ranging up to just over $7 per hour. A minimum wage is a price floor. Because most employees in the United States earn wages in excess of the minimum, their employment opportunities are largely unaffected by the minimum wage law. However, low-skilled and inexperienced workers whose equilibrium wage rates are lower than the minimum wage will be affected. Without a minimum wage, the supply of and demand for these low-skilled workers would be in balance at a wage rate of $4.00. Because the minimum wage makes low- skilled labor more expensive, employers will substitute machines and more highly skilled workers for the now more expensive low-skilled employees. Fewer low-skilled workers will be hired when the minimum wage pushes their wages up. The result will be a reduction in employment of low-skilled workers from E, to E,.
On the supply side of the market, as the wages of low-skilled workers are pushed above equilibrium, there will be more unskilled workers looking for jobs. At the $5.15 wage rate, the quantity of workers searching for jobs will exceed the quantity of jobs available, causing excess supply. Economists generally use the term unemployment when referring to excess supply in a labor market.
In summary, economic analysis indicates that minimum-wage legislation increases the rate of unemployment among low-skilled workers. The exceedingly high unemployment rate of teenagers in the United States (one of the groups most affected by the minimum wage) is consistent with this analysis. In the United States, the unemployment rate for teenagers is more than three times the average for all workers, and the unemployment rate for black youth has generally exceeded 30 percent in recent years.
It is important to remember that the market price- the wage rate- is only one dimension of the transaction. When a price floor pushes the wage rate above equilibrium, employers will have less of an incentive to offer nonwage benefits to employees because they will have no trouble hiring low-skilled workers. Predictably, a higher minimum wage will lead to a deterioration of the nonwage qualities of minimum-wage jobs, and so workers in these jobs will experience less convenient working hours, fewer training opportunities, and less continuous employment.
The adverse impact of the minimum wage on the opportunity of youthful workers to acquire work experience and on-the-job training is a particularly important unintended consequence of minimum-wage laws. Low-paying, entry-level jobs can provide workers with experience that will help them move up the job ladder to higher-paying positions. Employment experience obtained at an early age, even on menial tasks, can help a person acquire self-confidence, good work habits, and skills that make them more valuable to future employers. The minimum wage makes this more difficult. Not only does the minimum wage make it harder for low-skilled workers to find jobs, it also reduces their on-the-job training opportunities. In order to pay the higher wage rate required by the law, employers will have to find other ways to cut employment costs, like reducing the amount of job training. Not surprisingly, most minimum-wage jobs are dead-end positions with little opportunity for future advancement.
Workers who are able to maintain their employment at the higher minimum-wage most likely the better qualified among those with low skill levels
- rate
- a minimum wage. But other low-skilled workers are harmed by the minimum wage,
particularly those with the lowest skill levels, who will find it more difficult to get jobs. How many fewer low-skilled workers are hired because of the minimum wage? Studies indicate that a 10 percent increase in the minimum wage reduces the employment of low-skilled workers by 1 to 3 percent. Minimum-wage supporters argue that the higher wages for low-skilled workers are worth this reduction in employment and job-training opportunities. Critics argue, however, that the reduced job opportunities for the lowest-skilled workers are reason enough to eliminate the minimum wage. Does the minimum wage help the poor? Most minimum-wage workers belong to families with an income substantially above the poverty line. In fact, about 40 percent of minimum-wage workers are members of a family with an income in the top half of the income distribution. The typical minimum-wage worker is a spouse or a teenage member of a household with an income well above the poverty level. Therefore, even if the effects of a higher minimum wage on employment and non wage forms of compensation were small, a higher minimum wage does little to help the poor, making it a much less attractive antipoverty program than other alternatives.
Tags: employers, Minimum wage, payment