Minimum Wage: What Do the Economists Say?
In economics, the minimum wage is a very tricky question.
Indeed, it's one of the biggest questions right now where many economists vehemently disagree. And with its enormous political and social implications, this is a question that needs to be answered more than ever.
At face value, the effects of a minimum wage are simple. Any introductory Micro class will teach that price floors---in this case, a minimum wage that restricts wages to above a certain price point---will simply lower the quantity demanded of labor and create unemployment for unskilled workers, hurting the very people the minimum wage is intended to help. In other words, let's say unskilled labor is only worth, for example, 10$/hour, but the government raises minimum wages to 20$. Then, businesses will start realizing, “We're already paying 20$, so what’s the point in keeping the unskilled labor? Let’s fire them all and bring in skilled ones, people actually worth the 20$”. This drives unemployment among the minimum-wage workers of the country.
A clear example of this is what happened when Seattle raised the minimum wage to 15$, and saw unemployment rise by 1 percent even as national unemployment fell .5 percent. [1] [2]
Proponents further cite the relationship between minimum wage and unemployment levels across countries in Europe and North America as further evidence of a wage hike's impact on employment levels.
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| Figure 1: Minimum Wage and Unemployent in Europe |
For these examples, many economists have long argued that minimum wages, contrary to improving working conditions, drive unemployment. The CBO has gone so far as to state that a mininimum wage increase will destroy at least 500,000 jobs. [3]
However, the issue is rarely that simple.
Card and Krueger, two labor economists, published a famous 1995 study analyzing employment patterns in New Jersey and Pennsylvania. [4] Cleverly exploiting a natural experiment, they knew that New Jersey would raise its state minimum wage on April 1, 1992. Therefore, they surveyed fast-food chain restaurants in the Philadelphia metropolitan area in February and March of 1992, and repeated the survey in November and December.
Surely enough, they found that, even as New Jersey raised the minimum wage, employment increased in New Jersey restaurants and fell in Pennsylvania restaurants, contrary to orthodox economics theory. They attributed this outcome to minimum wage, finding "no evidence that the increase in minimum wage significantly lowered teenage employment rates in more highly affected states." They suggested that monopsony forces in the labor market---in other words, the market power exerted by businesses on prospective employees---were repressing wages. As such, minimum wage could be raised without any unemployment effects---if anything, a minimum wage would benefit employment. The storm this paper shook on the economics consensus would be enormous, and this work would go on to win David Card his Nobel Prize (Krueger had passed away a few years prior).
However, this research has suffered from replicability. Wessels (2007), utilized the same methodology as Card and Krueger, with improved controls for the economic expansion of the 1990s. [5] Applying this model, he found that teenage employment rates fell in the affected states, arguing that higher minimum wages does, in fact, contribute to higher unemployment.
Economics research by Neumark and Wascher (2000), Abowd et al (2000), and Neumark and Nizalova (2007) seem to confirm this hypothesis. [6][7][8] The literature seems broad---that minimum wage increases hurt employment. The only question that remains is "How much of an increase?" It's definitely conceivable that small increases in minimum wage exert entirely insignificant impacts on employment, small enough to still keep minimum wage as a good policy. Krueger maintains this argument, that small and graudal increases to minimum wage would be beneficial, while larger pushes---for a 15$ minimum wage, for instance---would be too extreme. [9] This consensus is largely supported by a a large-scale survey of economists. [10]
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| Economists respond to statement: If the federal minimum wage is raised gradually to $15-per-hour by 2020, the employment rate for low wage US workers will be substantially lower than it would be under the status quo, |
Ultimately this point, however, the question of the minimum wage is a policy question, with dozens of social and value-based concerns at play. And that is a question economists cannot answer.
Citations
[5] Wessels, W. (2000). A Reexamination of Card and Krueger's State-Level Study of the Minimum Wage. Journal of Labor Research, 28(1):135-146. https://www.researchgate.net/publication/225737303_A_Reexamination_of_Card_and_Krueger's_State-Level_Study_of_the_Minimum_Wage
[6] Neumark, D., & Wascher, W. (1995). The Effect of New Jersey’s Minimum Wage Increase on Fast-Food Employment: A Re-Evaluation Using Payroll Records. https://doi.org/10.3386/w5224
[7] Abowd, J., Kramarz, F., & Margolis, D. (1999). Minimum Wages and Employment in France and the United States. Library Union Catalog of Bavaria, Berlin and Brandenburg (B3Kat Repository). https://doi.org/10.3386/w6996
[8] Neumark, D., & Olena Nizalova. (2004). Minimum Wage Effects in the Longer Run. Library Union Catalog of Bavaria, Berlin and Brandenburg (B3Kat Repository). https://doi.org/10.3386/w10656
[9] Krueger, A. B. (2015, October 9). Opinion | The Minimum Wage: How Much Is Too Much? Nytimes.com; The New York Times. https://www.nytimes.com/2015/10/11/opinion/sunday/the-minimum-wage-how-much-is-too-much.html
[10] $15 Minimum Wage - Clark Center Forum. (2021, March 11). Clark Center Forum. https://www.kentclarkcenter.org/surveys/15-minimum-wage/
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