The minimum wage in theory and practice


Economics is a subject that combines the abstract and the empirical.* It both builds mathematical models and uses statistics. And it needs to know how to balance the two. The danger of one approach predominating is illustrated by the issue of the minimum wage.

There is a pretty strong economic reasoning for saying that unemployment will rise if you raise the cost of labour. That leads many free marketeers to oppose the minimum wage.

The minimum wage makes some workers, those with the lowest skills, more expensive than they otherwise would be. When things get more expensive, people look for ways to avoid that increased expense. In the case of the minimum wage, employers try to substitute machines and technology for workers, or use higher-skilled workers who are already paid above the minimum instead of lower-skilled workers. It doesn’t require any extreme assumptions about the labor market being in equilibrium or that the demand curve is derived from the marginal product of labor. It’s just that there is some demand for labor and that it slopes downward. All that means is that when workers get more expensive, you try to avoid paying those costs. This is a not neoclassical or neoliberal or Chicago view of the world. It’s everyone’s view of the world.

I understand the force of this logic – I subscribed to it myself for a while. However – as the author of the above extract – has to admit the empirical evidence does not bear this out. As Laura D’Andrea Tyson a former chair of the Council of Economic Advisors writes at Economix:

a raft of meticulous economic research, including work by David Card and Alan B. Krueger, who served as chief economist at the Labor Department in the Clinton administration and more recently as the chairman of the Council of Economic Advisers in the Obama administration, has decisively demolished the old shibboleths. The weight of the evidence consistently finds no significant effects on employment when the minimum wage increases in reasonable increments.

For a good overview, look to a paper by Arindrajit Dube of the University of Massachusetts, Amherst; T. William Lester of the University of North Carolina, Chapel Hill; and Michael Reich of the University of California, Berkeley. Using two decades of data and side-by-side comparisons of bordering counties in the United States, they find that higher minimum wages raise the earnings of low-wage workers and have negligible effects on employment levels. According to their estimates, an increase of 10 percent in the minimum wage would have a statistically negligible effect on employment in industries and occupations employing minimum-wage workers.

In 1996, the prevailing view among economists was that an increase in the minimum wage would reduce employment. But opinions have changed in response to the evidence. In a recent survey of a panel of leading economists, only a third expected that an increase in the minimum wage to $9 an hour would make it “noticeably harder for low-skilled workers to find employment,” and nearly half agreed that the economic benefits of raising the minimum wage and indexing it to inflation would outweigh the economic costs.

So following the approach of John Maynard Keynes that: “when the facts change, I change my mind,” I’ve come round to the idea of a minimum wage and even campaigned for a living wage. However, I don’t imagine that we can push the minimum wage up indefinitely. For example, part of the recent difficulties of Puerto Rico seems to have been combining a Caribbean labour market with the US Federal minimum wage.


* Yes you’re right that doesn’t really distinguish it from other subjects


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