The effect of minimum wages on employment

By Paul Walker 10/02/2014 6


Recently Eric Crampton at Offsetting Behaviour wrote,

I suppose it’s also relevant that Obama wants a substantial hike to the US minimum wage. A dark side of me wants him to do it, just so we can get some clean estimates of just how bad the disemployment effects would be.

Some people would claim that the disemployment effects would be zero or even that the effects on employment would be positive. But economists, by and large, go for there being a disemployment effect of minimum wage increases. Wilson (2012) summaries economists thinking on this as,

The main finding of economic theory and empirical research over the past 70 years is that minimum wage increases tend to reduce employment. The higher the minimum wage relative to competitive-market wage levels, the greater the employment loss that occurs. While minimum wages ostensibly aim to improve the economic well-being of the working poor, the disemployment effects of a minimum wages have been found to fall disproportionately on the least skilled and on the most disadvantaged individuals, including the disabled, youth, lower-skilled workers, immigrants, and ethnic minorities.

and

In 2006 David Neumark and William Wascher published a comprehensive review of more than 100 minimum wage studies published since the 1990s. They found a wider range of estimates of the effects of the minimum wage on employment than the 1982 review by Brown, Gilroy, and Kohen. The 2006 review found that “although the wide range of estimates is striking, the oft-stated assertion that the new minimum wage research fails to support the traditional view that the minimum wage reduces the employment oflow-wage workers is clearly incorrect. Indeed . . . the preponderance of the evidence points to disemployment effects.”

Nearly two-thirds of the studies reviewed by Neumark and Wascher found a relatively consistent indication of negative employment effects of minimum wages, while only eight gave a relatively consistent indication of positive employment effects. Moreover, 85 percent of the most credible studies point to negative employment effects, and the studies that focused on the least-skilled groups most likely to be adversely affected by minimum wages, the evidence for disemployment effects were especially strong. In contrast, there are very few, if any, studies that provide convincing evidence of positive employment effects of minimum wages. These few studies often use a monopsony model to explain these positive effects. But as noted, most economists think such positive effects are special cases and not generally applicable because few low-wage employers are big enough to face an upward-sloping labor supply curve as the monopsony model assumes.

Ref:

  • Wilson, Mark (2012). “The Negative Effects of Minimum Wage Laws” Policy Analysis, June 21, No. 701, Cato Institute.


6 Responses to “The effect of minimum wages on employment”

  • Or, for an alternative view…

    http://www.nytimes.com/2014/02/20/opinion/the-clear-benefits-of-a-higher-wage.html?hp&rref=opinion

    And further comment from one of their Economix blog contributors…

    http://economix.blogs.nytimes.com/2014/02/18/the-impact-of-a-minimum-wage-increase/#more-172415

    …who also late last year published this post on the same topic…

    http://economix.blogs.nytimes.com/2013/12/04/the-minimum-wage-and-the-laws-of-economics/#more-170580

    …which included linking to this…

    http://opinionator.blogs.nytimes.com/2013/11/30/the-minimum-we-can-do/

    Economics 101 taught a simple lesson on this topic: if the minimum wage is increased to above equilibrium, unemployment will result. Like a lot of economics this seems like common sense – once you hear it said!

    Now obviously, just the fact that the current minimum wage is set at a certain level does not prove that it is the equilibrium level. I have yet to find a paper purporting to have identified the true equilibrium for a minimum wage.

    The main strategy in objecting to an increase in the NZ minimum wage appears to be that, in the OECD, compared to the average wage, ours is on the high side. But that begs the question of how other countries have both a higher minimum wage – in relation to their average wage – and a lower level of unemployment than we do. And the fact that with even with that relatively high minimum wage, a few years ago our unemployment level was teasing 3%. That suggests to me that the minimum wage is not currently the problem.

    Finally, even if some unemployment was generated by a moderate increase in the minimum wage, a less governmental punitive attitude combined with learning opportunities could transform the experience of those in that unfortunate position to a positive one, i.e. yes, spend more on the unemployed as well as increasing the minimum wage.

    • Wages are at an equilibrium when you have as many people willing to sell the kinds of labour services they provide at the going wage rate as there are tasks for which people are willing to hire at the going wage rate. It’s a bit odd to talk about the minimum wage being at an equilibrium level. A minimum wage can be non-binding, in which case it is set below the equilibrium level. In that case, the minimum wage doesn’t matter. Say the minimum wage were $0.10/hour and nobody (except interns who work for free) worked for less than $1/hour anyway. The minimum wage would be non-binding. If you increased it to $0.20/hour, it would still be non-binding as it would be below the market’s equilibrium level. If you set it at $1000/hour, it would be above the equilibrium wage level and would be very binding. In neither case does it make any sense to talk about whether a minimum wage is at an equilibrium level. I suppose the only case where you could imagine its making sense would be if you managed to set the minimum wage at exactly the wage people were already getting, but even that’s a reach: wages vary across people and industries.

  • The problem in NZ is not that minimum wage is set too low in absolute terms, but rather that is not set relative to the cost of transport + base living expenses (housing +food +electricity +communications). This is largely due to the peculiar way in which the consumer price index, and unemployment support has been developed in NZ.
    if the Unemployment (JobSeeker) benefit was set at 100% of the base cost of living and the minimum wage at say 120% of base + transport costs their would be little change in the employment market. Good employers would still be able to employ the staff needed, but employees might be able to save and invest a portion of the minimum 20% surplus the earned. With appropriate encouragement from government that surplus could have a significant economic benefit to the nation, aside from the obvious social benefits of a nation whose public is not just surviving, but actually living.

    • You’re then wanting to turn the unemployment benefit into a kind of a demigrant, with the minimum wage set marginally above it, and with both very high relative to the current minimum wage. I expect that would have pretty substantial effects on labour force participation and on unemployment.

  • I have seen the suggestion of a citizens wage, for every adult’ enough to fulfill basic needs but not so much to be comfortable. Employers would need to provide conditions: dollars and positive work conditions to get staff. I think we should talk minimum income.

    Not a demigrant; an opportunity. Citizens would be in a position to study, formally or as independent learners; whatever they wanted to do. They could work to improve the lot of fellow citizens through voluntary work, elders could engage positively with youngsters without the threat of abject poverty over them. Students, the sick and un-partnered parents would be supported pleasantly, without the bullying of our current way. We would also support, as a citizen, those between employment or developing opportunities.

    Funded by fees to cover the environmental and social externalities in products like fuel and fertilizer, by capital gains taxes from those currently freeloading, a Tobin tax, money saved by closing WINZ down,.. And over time the creative actions of citizens would come back in taxes. Think J.K.Rowling and Harry Potter. Her support has to be one of the best investments the British Government ever made.

    After all, what is the point of an economy and all our science and technology if we can’t have fun.

    • I’m not necessarily against proposals around a guaranteed annual income, where the GAI would replace the bulk of the current support system. But I do note that there’s been a lot of obfuscation around just how expensive these proposals could be. You suggest a few taxes that could be used for it, but if those taxes are worthwhile, they’re worthwhile whether or not we have a GAI. And, barring a carbon tax and congestion charging which would be worthwhile, the ones you’re proposing aren’t as painless as you’re thinking. We then get to Milligan’s trifecta: you can have only two of the following three things. 1) a generous payment to folks at the bottom; 2) a balanced budget; 3) a low tax burden. I think Treasury had reckoned on 50% marginal tax rates were we to implement GAI proposals.

      Folks on the left tend to support GAIs as supplements to that which already exist; marginal tax rates would then be much much higher. Folks on the right will sometimes propose a GAI as replacement for the entire set of existing benefits without noting that this would necessarily either substantially reduce payments to the worst off or result in very high tax rates.

      There just aren’t free lunches here to be had. In the US, there are tons of inefficiencies built into the tax system, the abolition of which could fund a GAI (or other tax cuts, or other spending); NZ’s already pretty close to the efficiency frontier so there aren’t free gains available.