The Minimum Wage

Economics has generated various laws - a priori truths - that are unarguable. Demand curves slope downwards, always, everywhere. People act purposefully, without exception.

A curious case of economists' wisdom arises when people talk about a minimum wage. We know, as a matter of theoretical truth, that minimum wages increase unemployment. Depending on how you measure it, this can become obscured, but it is unarguable. There will be less working after a minimum wage then before.

That's not to say that some people don't benefit - those lucky enough to keep their jobs will - but it's a bad policy. Hence politicians need to abuse the ignorant with rhetorical gimmicks, for example referring to it as a living wage. I mean, who can argue against that! It implied we're advocating a "non-living" wage, or a "dead" wage...

I don't mind non-economists' being ignorant of economic arguments, but surely politicians should know the facts? Well, maybe they do know the effects of a minimum wage. Alex Tabarrok reveals that:

It's no surprise that progressives at the turn of the twentieth century supported minimum wages and restrictions on working hours and conditions.  Isn't this what it means to be a progressive?  Indeed, but what is more surprising is why the progressives advocated these laws.  A first clue is that many advocated labor legislation "for women and for women only."

Progressives,..., were interested not in protecting women but in protecting men and the race.   Their goal was to get women back into the home, where they belonged, instead of abandoning their eugenic duties and competing with men for work.

Unlike today's progressives, the originals understood that minimum wages for women would put women out of work - that was the point and the more unemployment of women the better! 

 

And this is the interesting thing: pretty much every economist - the experts on this issue - knows that minimum wages are bad.

However, in 1996, in a study by Card and Krueger, an empirical claim was made that the introduction of a minimum wage in New Jersey did not reduce unemployment. Since that massive finding, the study was replicated and it's become known that the orginal survey asked the wrong question (they asked how many jobs had been lost, rather than how many hours had been reduced).

Isaac DiIanni has sent me the original responses from two exemplory economist's, following Card and Krueger's article. It's from the Wall Street Journal, 25th April 1996:

The inverse relationship between quantity demanded and price is the core proposition in economic science, which embodies the presupposition that human choice behavior is sufficiently rational to allow predictions to be made. Just as no physicist would claim that "water runs uphill," no self-respecting economist would claim that increases in the minimum wage increase employment. Such a claim, if seriously advanced, becomes equivalent to a denial that there is even minimal scientific content in economics, and that, in consequence, economists can do nothing but write as advocates for ideological interests. Fortunately, only a handful of economists are willing to throw over the teaching of two centuries; we have not yet become a bevy of camp-following whores.
James M. Buchanan, a 1986 Nobel laureate in economics, is a professor at George Mason University.
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Years ago, economists used to believe there was no such thing as a free lunch. Some now seem to have found one, however, in the proposed increase in the minimum wage. Raising the minimum wage by law above its market determined equilibrium, they argue, actually costs nobody anything. (Or at worst, costs nobody very much because it's only a small, marginal increment, after all.) Is all this too good to be true? Damn right. But it sure plays well in the opinion polls. I tremble for my profession.
Merton H. Miller, a 1990 Nobel laureate in economics, is a professor emeritus at the University of Chicago.

Comments

[Aakash]

So the reason that the minimum wage was begun was to prevent women from working in jobs that men were in?

I haven't read through that PDF paper, but color me skeptical...

[AJE]

Who suffer from the presence of low-skilled workers? People who currently have low-paying jobs. Right?

What's the name of worker cooperatives for these people?
Trade Unions.

Who support minimum wages? Trade Unions.

Get it?

Yes, the reason Trade Unions support a minimum wage is to increase their own earnings, at the expense of society as a whole - and especially at the expense of low-skilled, minorities, and immigrants.

Damn right.

[Quinn]

Agreed that in theory a minimum wage costs jobs, but what about in practice? Could it not just lead to wage inflation; or indeed, if the poorest in society have their incomes increased, could that not lead to an increase in consumption spending, leading to higher demand for goods, and so actually create jobs? (No doubt you will dismiss that last idea as pseudo-Keynesian claptrap; and rightly so).

When the UK introduced a minimum wage, unemployment and inflation fell; I am not saying these were linked, and perhaps unemployment would have fallen even further without a minimum wage, but is it possible to disentangle cause and effect from economic decision making and show empirical evidence that a minimum wage costs jobs?

[J.C. Ernharth]

Sorry to jump in here, but my experience (and, with all respect, is this not business school 101??), Quinn, is that when input costs rise in any production process, any entrepreneur worth anything will immediately be surveying for means of lowering his costs. On the most basic level, that includes looking for efficiencies with regard to labor costs at all times, across all wage scales. Survey most business people who are not also in some mercantilist relationship with the power structure that subsidizes the higher wage through some other coercively achieved efficiency -- and you'll hear the same time and time again.

Now, I don’t mean to get too rudimentary, but the examples are obvious enough -- Should the most unskilled bunch have a higher wage forced on the entrepreneur than the market would otherwise bear, that may bind all local businesses by the same obligation. However, it will not stop the management from seeking other alternatives to low skilled local labor, including off-shoring jobs, and investing in newer technology far sooner than they would have otherwise.

For direct examples, in the U.S, the do-it-yourself Super market scanners at the check out, and do it yourself gas pumping, etc., arrived far sooner than they would have otherwise. The same goes for off-shoring jobs to emerging economies, where the incentives to overlook the otherwise cumbersome risks reach a tipping point (although, obviously labor costs are not exclusively to blame). Of course, any free economy is going to see technology and new efficiencies change the labor situation as it displaces old masters of outdated technology. But a minimum wage merely forces the issue much earlier – this legislation makes it so the future must be dealt with today, so to speak.

Anyway, to those running the site -- good material here. Nice blog!

[Quinn]

Fair points, JC, although to some extent you seem to be suggesting that a minimum wage doesn’t cost jobs, it just brings forward the day when the jobs are lost anyway in the pursuit of greater profits. In the case of your example about do-it-yourself gas pumping, in the UK almost all the petrol stations have been self-service since the seventies, while the minimum wage was only introduced in 1997.

It would be silly for me to suggest that a minimum wage would never cost jobs, so I won’t. Clearly it may lead to an increase in costs to a business, and if such costs cannot be absorbed then a business will look to make savings; and cutting labour costs would certainly be a likely area to make a start.

But thinking about many of the very poorest paid jobs in society – cleaners, security guards, hairdressers – these are not the sort of jobs where off-shoring is possible, or where you can easily substitute capital for labour. In the example of a hairdressers, I think they are more likely to just pay the minimum wage and recoup the cost by raising their prices, rather than lay off a barber (which could dent their capacity to earn income). Here the minimum wage would affect inflation, rather than unemployment.

[Isaac]

Some empirical evidence regarding both the effects and the historical motivations of minimum wage laws:

http://www.cato.org/pubs/journal/cj5n1/cj5n1-6.pdf

And there are PLENTY more scholarly articles with as much evidence as you are willing to read. Just go on JSTOR and do a search on "minimum wage unemployment".

[Marcin Tustin]

Of course, this rather supposes that employers are not enjoying rents in the form of depressed wages (such as because of occupational immobility of workers), and that even if there are rents, the minimum wage raises costs to such an extent that capital (and land) can be better employed to earn more than can be earned from continuing to employ their exploited employees.

If both those propositions obtain (rents and no better alternative), the minimum wage will tend to reduce the employer's rent without decreasing demand for labour. In so doing, it may well increase aggregate demand in the economy, leading to economic growth. Whether any of these obtian is an empirical question, and given that people do in fact only take the very lowest paid jobs because they really cannot do better, it is not unreasonable to believe that rents *may* be being earned.

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[Alexander]

Hi, I'm new here, but I would like to add a suggestion. What if there were linked decreases in wages and prices? The prevailing economic thought seems to be that minimum wage forces prices artificially high. However, the only way to sustain a lower minimum wage would be to severely cut prices. Would that occur?

[aje]

Not sure I understand the question - wages *are* prices afterall. For markets to clear in a world of deflation real wages need to also fall, and a minumum wage (a nominal wage barrier) makes that less likely...

[Alex]

True. But my question is in today's world of contrived prices, what else(besides wages) would prevent companies from cutting prices for their products? Because if minimum wage goes down, but prices for goods and services do not, a massive drop in demand will occur.

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