Will introduction of a minimum wage increase unemployment?

Question

In economics, you commonly hear the clear that a minimum wage law will reduce employment. Is there empirical evidence that either supports or debunks that claim?

Reducing employment or increasing unemployment? They're not the same thing, due to the "not in the labor force" category. — dan04, Mar 22 '11 at 02:12
One should note that many (if not most) of the minimum wage positions are positions with a relatively fixed demand - such a cleaning, cashiers, security, etc - so these positions are unlikely to disappear — Ophir Yoktan, Mar 28 '11 at 07:52
@Ophir: they usually don't disappear, just go "gray". For example same person is hired half-time on paper while actually working full-time. Or people start working completely w/o contracts (thus also not paying taxes, nor social security). — vartec, Mar 26 '12 at 15:08
It's kind of one of those "in a closed system" things, I think. It really depends on conditions. In some conditions it would mean less money available for owners to hire workers, less employment. In others, where owners are already sitting on piles of cash but demand is weak, it means more spending money, more demand, better employment. — PoloHoleSet, Nov 17 '16 at 16:03

Borror0 · Accepted Answer · 2012-03-26T14:42:06.657

20

The answer to this question is "we're not sure yet."

The "old minimum wage research" shows that there is a negative impact, but more recent research - e.g. Card and Kreuger (1993) and Dube, Lester, and Reich (2010) - show that there is no significant effect.

There have been attempts at reconciliation the literature on the subject, but, to the best of my knowledge, nothing resembling a consensus has been achieved amongst economists.

When reviewing the possibility to raise the minimum wage again, Québec's Interdepartmental Committee for the Review of the Minimum Wage compiled a short review of the literature. It's written in language most people will understand, and only six pages long. It's definitively worth reading.

In the event you don't feel like reading it, the most interesting passage is the following:

Economic debate concerning the minimum wage has essentially been focussed around two subjects of discussion. These are the impacts that such a policy has on employment levels and its effects on the distribution of wealth. Economic theory generally approaches the impacts that the minimum wage may have on employment using mainly two models. These are a “pure and perfect” competition model (or neoclassical) and an imperfect model called “monopsony”.

Over the last 40 years, economic studies based on the neoclassical model show that mainly young people less than 24 years old are generally the most affected by job reductions that are likely to take place when the minimum wage increases. Elasticity calculated by these models varies between –0.1 and –0.3, meaning that a 10% increase in the actual minimum wage will generate a reduction of employment for young people varying between 1% and 3%. An econometric made by the Department of Finance leads to a similar conclusion for young people aged between 15 and 19.

However, numerous conditions must be met for this model to apply, and because of that, many economists have challenged its relevancy, especially since the nineties. These economists prefer the use of a monopsony model that includes market imperfections. Results obtained using this model are very different from those obtained with the neoclassical model. In fact, they lead to the conclusion that the increases in the minimum wage that occurred over the last 15 years in certain areas of North America and Europe did not hinder employment.

edited Mar 26 '12 at 14:42

answered Mar 10 '11 at 22:28

Borror0

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I suspect the difference seen between 'old MW research' and 'recent MW research' is related to the shift from mostly autonomous national economies towards a single global economy. – oosterwal Mar 29 '11 at 20:39
@oosterwal: Unlikely. For example, raises of the minimum wage in the UK still [seem to cause](http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2005/02/tony_blair_toda.html) a rise in unemployment. Like I said, there have been many attempts at reconciliation but none have been successful so far. At least, to the best of my knowledge. – Borror0 Mar 29 '11 at 20:53
@Borror0: What significant effect can raising the minimum wage have other than removing from the workforce those who have no job but would be willing to work for less than minimum wage? Removing a certain portion of the potential workforce from the labor pool will increase the price of labor. On the other hand, if the wages earned by those who work have to be taxed to pay welfare to those who would work but are prevented from doing so, even the workers who keep their jobs really don't benefit. – supercat Feb 10 '12 at 00:08
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@supercat: The only beneficiaries of an increased minimum wage are the kids of the middle class. While it is often thought as a tool to fight poverty, people under the poverty line are not statistically overrepresented in the population that earns the minimum wage. ([source](http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/11/more-on-the-ineffectiveness-of-minimum-wages-as-an-antipoverty-measure.html)) Does that answer your question? – Borror0 Feb 10 '12 at 01:38
@Borror0: My question is, in essence, how imposing a minimum wage would have any effect *other* than by removing people from the workforce. If there weren't any unemployed people who would be willing to work for less than minimum wage, I can't see that the minimum wage would have any effect whatsoever. If such people did exist, then the minimum wage would be preventing them from doing what was necessary to get a job. People who propose government intervention in the economy come up with all sorts of fancy theories, but I find it most useful to focus on the basics: how can something work? – supercat Feb 10 '12 at 01:47
@supercat: When you say the following, you are absolutely correct: "If there weren't any unemployed people who would be willing to work for less than minimum wage, I can't see that the minimum wage would have any effect whatsoever. If such people did exist, then the minimum wage would be preventing them from doing what was necessary to get a job." – Borror0 Feb 10 '12 at 01:54
@supercat One possibility would be that people who earn minimum wage wouldn't need to work 2 or 3 jobs at once to get by. – ChrisW Mar 07 '12 at 04:44
@ChrisW: As I mentioned above, generally speaking, people who struggle to get by already win more than the minimum wage. If you want to combat poverty, there are better economic tools at your disposal than the minimum wage. – Borror0 Mar 07 '12 at 05:06
@Borror0 - Although I accept as true that kids earn minimum wage, and true that even people earning more than minimum wage (or not earning at all) are poor, I don't believe your assertion that increasing minimum wage doesn't help some poor people (i.e. those who are poor and working for minimum wage). – ChrisW Mar 07 '12 at 14:04
@ChrisW: I never said it does not help them, but that it was a very inefficient tool for the job. The government would be better off increasing the consumption taxes return than touching the minimum wage, if it wants to fight poverty, for example. The notion that the minimum wage accomplishes anything of value is detrimental because it stands in the way of those effective solution. – Borror0 Mar 07 '12 at 17:12
If the minimum wage is higher than the value of the goods or services to be produced, the job will not get created (or be removed). Say you can produce 100 items an hour, at a wage of $10 an hour, the value of the product will have to be at least $0.10 for your employer to break even (and that's without taking his other cost into account, so actually it'll have to be a lot higher). – jwenting Mar 08 '12 at 07:40
@supercat: The minimum wage prevents a race-to-the-bottom in wages in conditions where workers have no special skills and the market is glutted with unemployed. Raising the minimum wage produces a market which is closer to efficient (as does raising taxes on the wealthy), since it is correcting for market imperfections that allow a non-uniform distribution of wealth. Making a market more efficient leads to greater growth, and more employment, not less. – Ron Maimon Mar 27 '12 at 03:49
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@RonMaimon: Such a "race to the bottom" would only occur if there were people who wanted jobs but couldn't get them; the minimum wage prevents the "race" by leaving such people unemployed. I'm not sure how forcing employers to pay more, thus increasing the costs of goods, while other would-be workers are forced to sit idle and have to be supported by taxes, is supposed to improve market efficiency. The lower value per dollar and the increased tax burden will gobble up much if not all the good the minimum wage is supposedly doing for its beneficiaries, and hurt everyone else. – supercat Apr 12 '12 at 13:28
@supercat: this is assuming that absent a minimum wage, the market values labor correctly. MW does not leave the people unemployed--- but increases the purchasing power of teenagers and the poor, leading to a demand increase which increases the need for labor. Such an increase would not happen if the market were perfectly efficient to begin with, since it would have already found a good use for every person's skill. But in fact, an industrial economy does not produce full employment under unregulated conditions, and requires both minimum wage and heavy progressive taxation for full employment. – Ron Maimon Apr 16 '12 at 04:24
I know that what I am saying runs against all efficient market theory, but it is a fact of nature that economists deny too much. The demand in an economy can be reduced to nothing by even a relatively small number of unemployed people who cannot find jobs and cannot consume, and drive down wages by competition for other unskilled labor. Such inefficiencies can be corrected by heavy handed regulation, progressive, even punitive, taxes, and a high minimum wage, or an equivalent system of negative income tax for low-wage earners. This is Clinton's EITC model, and it produced the most growth. – Ron Maimon Apr 16 '12 at 04:27
@RonMaimon: The EITC is a good thing, since it reduces the work-punishing effects of many welfare/support policies. Oftentimes, a part-time $1/hour job "off the books" will increase a welfare recipient's pocket money more than would a minimum-wage job "on the books". Increasing the value to the worker of low-wage jobs while reducing the cost to the employer will reduce welfare rolls by an amount which will more than make up for the EITC's direct "taxpayer cost". – supercat Apr 20 '12 at 23:43
Raising the minimum wage would not increase unemployment if the minimum wage is below the natural market minimum wage. For example, if the minimum wage in America was $1000 per year, and was raised to $2000 per year, it would not affect unemployment, because nobody would be working at those wages anyway. But if it was $30000 per year, and was raised to $40000, it would definitely cause unemployment then. – sashoalm Feb 24 '14 at 07:31

JTP - Apologise to Monica · Answer 2 · 2014-02-22T21:18:22.493

Why Does the Minimum Wage Have No Discernible Effect on Employment? is a paper published Feb 13. From the executive summary -

The report reviews evidence on eleven possible adjustments to minimum-wage increases that may help to explain why the measured employment effects are so consistently small. The strongest evidence suggests that the most important channels of adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners ("wage compression"); and small price increases. Given the relatively small cost to employers of modest increases in the minimum wage, these adjustment mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers.

As a financial author, I take issue with the tossing around of supply/demand, as if any increase in the cost of one thing (here, the cost of labor) has the same effect as anything else. As the first answer here suggests, the elasticity may be lower than claimed, and those who offer the sweeping statement "when you raise the cost of something you get less of it" aren't talking economics, but playing to an audience.

Edit - I am not quoting any one pundit. Any CNN, Fox, etc show that has this debate will result in someone against the proposal citing supply/demand as an absolute truth with no clarification. If the total wages received, post increase are well above those before, a small decrease in employment is not a reason to vote against this increase.

The current proposal, to raise the federal minimum wage to $10.10 an hour by 2016, doesn't take effect all at once, it would occur over a few years. It will be simple enough to observe the effect of the first increase, and decide what the results really were.

When you talk about the "current proposal", please give a reference to what you are referring to. Similarly, please provide examples of people "tossing around" supply/demand, and reference why "raising the cost -> you get less of it" isn't an accepted economic theory. — Oddthinking, Feb 22 '14 at 15:33
Much appreciated. Edited to try to address these points. Will revisit if needed. — JTP - Apologise to Monica, Feb 22 '14 at 17:58
My unerring psychic powers suggest that "it will be simple enough to observe the effect...and decide," will prove to generate two different narratives, one decisively proving the benefit and one the opposite. To prove my unerring psychic powers, I have written the names of each of these narratives with their associated political parties and sealed them in this envelope, which will be opened in November 2016. — Larry OBrien, Feb 22 '14 at 18:32

Will introduction of a minimum wage increase unemployment?

2 Answers2