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  1. #1

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    Mar 2007
    Fairfax, VA
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    Increasing the Minimum Wage hurts those most vulnerable in our society.

    I realize this is a bit of a long OP, but I think the amount of research necessary to counter popular feelings needs to be significant.

    The underlying claim that I will deal in this thread is that increases to the minimum wage negatively affect employment. Specifically, the minimum wage negatively affects employment for those workers most vulnerable to economic fluctuations, low skilled workers.

    The minimum wage is a regressive policy that both lowers employment prospects for the lowest skilled workers and prevents those workers from acquiring the experience that will boost them into higher paying jobs.

    There are two broad arguments I will make to support this argument. I will forgo the historical discussion of the racial origins of the minimum wage in the United States, or its current use as a tool of discrimination in other countries around the globe for the present time.

    Microeconomic Law – Downward sloping Demand Curve

    Just like with any other good or service, labor has a downward sloping demand curve. Some times of labor have steeper curves than others, generally lower skilled workers have a much steeper curve than college educated or experienced labor since they are more easily forgone or replaced with substitutes (machinery, etc).

    The concept is quite simple. Would you buy less of something as the price increased? Of course you would. The same is true for labor. For each individual consumer in the normal market they won’t pay more for a good than it is worth to them. For each consumer of labor, the same concept applies, the manager, or owner or supervisor won’t hire someone for more than they contribute to the company’s revenue, known as marginal contribution. Here is a great video explaining it generally, but he concept is simple. It makes no sense to pay someone more money than they make for the company.

    Bryan Caplan has done some interesting work with comparative data to show that labor, like every other demand curve is downward sloping. Specifically, he reviewed data not directly about the minimum wage to glean information about low skilled demand curves.

    He makes several key points:
    1) The effect of low skilled immigration on the wages of native low skilled workers. The lack of wage depression during several large scale immigration events shows that there is a large amount of elasticity in the quantity of low skilled labor employed (it also strongly argues against employer monopsony power, the ability of employers to dictate wages). Large elasticity in quantity demanded implies a steep downward slope on the demand curve.

    2) The effects of increased regulation on low skilled workers. Specifically done in Europe, these studies shown that when regulation increased the cost of employing low skilled workers, a company quickly downsized its low skilled labor market. That is a classic downward sloping demand curve. And since regulation cost and wage cost are identical to an employer, the same principle applies to a minimum wage.

    3) Price Control in general. Again, same point as above. Price controls have a large body of evidence showing that labor markets, especially low skilled labor markets suffer significantly when the marginal revenue is decreased due to a price control. That shows, yet again, a downward sloping demand curve for low skilled labor.

    4) If you are a Keynesian, you have to accept this downward slope because it was central to Lord Keynes’ General Theory. He argued that wages had a downward “stickiness” which led to unemployment and mandated intervention. There is no way to argue that wage stickiness leads to unemployment, but mandated wage increases do not.

    So we can see from this evidence that the idea of a downward sloping demand curve for labor is pretty robustly supported. Meaning that a vote for a minimum wage increase, is a vote against those on the margins of society having a job.

    To overcome this logical point, someone would need to show how labor is the only good or service ever known that does not comply with microeconomic law (that person could then stand by for the nobel prize). That is such an overwhelming hurdle to cross you’ll notice that no one makes the objection. Some will argue that the effect is actually very, very small, but no serious economist argues that it is zero.

    As such we can at least bound the argument on the bottom by saying that the Minimum Wage does, in fact, cause unemployment.

    Macroeconomic Evidence

    This is a relatively rare phenomenon in economics, but agreement with the claim “Does minimum wage hurt employment of low skilled workers” is about as universal as we can find. Recently, David Neumark (UC Irvine) conducted an environmental scan of the current state of economic research on the minimum wage. He reviewed more than 100 major academic studies (since 1992) and found that 85% of them find a negative effect on employment of low skilled workers.

    And Prof. Neumark is not the only economist to have done an environmental scan (a review of all academic literature on a subject) in recent years. Congress did one back in 1995 as well and found that the effects go beyond simply not hiring or letting go. At the margin, where people are retained at the higher income, other pecuniary benefits such as training, time off and working conditions suffered as minimum wages increased.

    It will also indicate that the minimum wage has wide-ranging negative effects that go beyond unemployment. For example, higher minimum wages encourage employers to cut back on training, thus depriving low wage workers of an important means of long-term advancement, in return for a small increase in current income.

    Scott Sumner has done some excellent work on the data coming out of Europe, where minimum wage laws vary significantly, and data is relatively reliable.

    There are nine countries with a minimum wage (Belgium, Netherlands, Britain, Ireland, France, Spain, Portugal, Greece, Luxembourg). Their unemployment rates range from 5.9% in Luxembourg to 27.6% in Greece. The median country is France with 11.1% unemployment.
    There are nine countries with no minimum wage (Iceland, Norway, Sweden, Finland, Denmark, Austria, Germany, Italy, Switzerland.) Five of the nine have a lower unemployment rate than Luxembourg, the best of the other group. The median country is Iceland, with a 5.5% unemployment rate. The biggest country in Europe is Germany. No minimum wage and 5.2% unemployment.


    So what does all this economic babble mean? I’ll make it brutally simple. If you support a minimum wage, you support hurting the lowest skilled workers in our economy (generally young minorities) in favor of those who are more moderately skilled. You prevent them from getting a foot on the economic ladder. You prevent them from competing with those who can spend money towards their personal capital.
    To use an illustration, generally, you are limiting the options for a young black female and helping a middle income white male (which incidentally, it was originally designed to do).
    There are plenty of other moral issues with the minimum wage as well, but I think we can start with these.

    Common Objections

    1) But what about Card and Krueger?

    Card and Krueger conducted a study that found there was no noticeable effect on unemployment (not low-skilled unemployment, the broader category) given minimum wage changes.

    I will quote an email from Prof. Don Boudreaux of George Mason:

    Dear Ms. Schall:

    Thanks for your e-mail. You allege that I and other “conservative economists are pigheaded in [our] refusal to recognize the revolutionary findings of scientific political economists.” You describe these findings as “proving beyond a doubt” that “raising minimum wages does not destroy the jobs of poor, struggling workers.” And you single out for praise the research of economists David Card and Alan Krueger.

    Card and Krueger did indeed conduct empirical studies purporting to overturn the proposition that raising the legislated minimum-wage reduces the employment options of low-skilled workers. But I believe that their work falls far short of being the successful revolution in labor economics that you think it to be.

    First, several empirical studies before and since the publication of Card’s and Krueger’s have shown results contrary to theirs.* It’s simply untrue that there is such a bulk of empirical research in support of the Card-Krueger thesis that it has been proven “beyond a doubt.” More importantly, evidence for their proposition is still so tentative that it is, in my opinion, insufficient to justify forcible interference by government in private labor contracts among consenting adults.

    Second, Card’s and Krueger’s method of measuring the effects of raising minimum-wages – which involves surveying employers, before and after minimum-wage increases, to gauge their reactions to higher minimum-wages – is inadequate. To explain this inadequacy I quote economist Thomas Sowell; it’s a lengthy quotation, but worthwhile to read in full:

    “Imagine that an industry consists of ten firms, each hiring 1,000 workers before a minimum wage increase, for an industry total of 10,000 employees. If three of these firms go out of business between the first and second surveys, and only one new firm enters the industry, then only the seven firms that were in existence both ‘before’ and ‘after’ can be surveyed and their results reported. With fewer firms, employment per firm may increase, even if employment in the industry as a whole decreases. If, for example, the seven surviving firms and the new firm all hire 1,100 employees each, this means that the industry as a whole will have 8,800 employees – fewer than before the minimum wage increase – and yet a study of the seven surviving firms would show a 10 percent increase in employment in the firms surveyed, rather than the 12 percent decrease for the industry as a whole. Since minimum wages can cause unemployment by (1) reducing employment among all the firms, (2) pushing marginal firms into bankruptcy, or (3) discouraging the entry of replacement firms, reports based on surveying only survivors can create as false a conclusion as interviewing people who have played Russian roulette.”**

    Donald J. Boudreaux
    Professor of Economics
    Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
    George Mason University
    Fairfax, VA 22030

    P.S. I’m not a conservative economist.

    * For example, Richard V. Burkhauser, Kenneth A. Couch, and David C. Wittenburg, “Who Minimum Wage Increases Bite: An Analysis Using Monthly Data from the SIPP and CPS,” Southern Economic Journal, Vol. 67, January 2000, pp. 16-40.

    ** Thomas Sowell, “Minimum Wage Laws,” in The Thomas Sowell Reader (New York: Basic Books, 2011), p. 112 (original emphasis).

    I am more than happy to detail the other statistical problems with Card and Kreuger, as well as to highlight how isolated their findings are if someone would care to defend them. That said, I’ll leave the above as an initial rebuttal.

    2) But it could be worth it, perhaps those who lose their jobs are so small as to make the benefit to those who don’t worth it?

    Laying aside the objection that this still proposes a trade off between the most marginalized in our society for the benefit of those who are less marginalized, the numbers don’t work out.

    There are currently 3,355,098 Americans working for minimum wage. (Calc: (US Population 313,914,040, working age pop: 58.5%, Labor Force Participation rate: 63%, percentage of workers working for minimum wage, 2.9%.)

    Generally, the low end of the research above indicates a 1% unemployment increase for every 10% raise in minimum wage. That would mean that 1,156,930 leave the labor force. Their wage goes from $7.25 to $0.

    This means a loss of $8,387,744 per hour.

    Meanwhile those who stay employed would gain .725 cents an hour. There are 2,198,168 who remain in the work force.

    This means a gain of $1,593,672 per hour.

    Total net loss of the policy is $6,794,072 per hour.
    "Suffering lies not with inequality, but with dependence." -Voltaire
    "Fallacies do not cease to be fallacies because they become fashions.” -G.K. Chesterton
    Also, if you think I've overlooked your post please shoot me a PM, I'm not intentionally ignoring you.



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