On Legislating ‘Living Wages’

by Don Boudreaux on January 15, 2006

in Prices, Reality Is Not Optional, Regulation

Jon Gertner’s cover article in today’s New York Times Magazine offers no surprises. It’s as predictable as what you’ll read here.

Gertner reports on the movement for a “living wage” – a movement working mostly at the local level, trying to persuade local governments to legislate minimum wages well above the national minimum wage of $5.15 per hour.

Of course, Gertner mentions the famous (or infamous) 1995 study by David Card and Alan Krueger in which the authors claim to find evidence that a hike in New Jersey’s minimum wage caused no fall in employment and might even have caused employment to increase. Card and Krueger are quoted, each predictably insisting that their data exposes the error in the standard economists’ analysis in which legislated minimum wages increase unemployment among low-skilled workers.

Gertner makes no mention of the many critical responses to Card’s and Krueger’s study. (He does quote critic David Neumark – once – but only on the success of the political movement for ‘living wages,’ not on the Card-Krueger study.) A good summary of the criticisms of Card-Krueger is this essay by Donald Deere, Kevin Murphy, and Finis Welch.  (I must also recommend this outstanding blog-post by my colleague Bryan Caplan, over at EconLog.)

Maybe Gertner can be forgiven, for Krueger told him that (in Gertner’s words) “Some recent surveys of top academics show a significant majority now agree that a modest raise in the minimum wage does little to harm employment.” If a “significant majority” of “top academics” accepts the Card-Krueger finding, why bother to talk with the lunatic fringe who cling to the archaic superstition that higher minimum wages cause greater unemployment?

But look more closely at what Krueger told Gertner – namely, “top academics” (we’ll assume those to be economists and not sociologists and experts on French literature) “agree that a modest raise in the minimum wage does little harm to employment.”

It seems as if Krueger is saying that economists now agree that “modest” increases in the minimum wage are justified, or at least not harmful. That is certainly Gertner’s reading of Krueger’s meaning.

But taken literally, the economist consensus that Krueger reports is neither new nor inconsistent with the traditional understanding that higher minimum wages reduce employment. This understanding has nothing to do with the extent of the effect that higher minimum wages have on employment; it has to do with the direction of the effect: higher minimum wages, lower rates of employment of un- and low-skilled workers.

Because more than 95 percent of American workers have skills sufficient to enable them to earn wages higher than the federal minimum, any “modest raise in the minimum wage” is unlikely to have an effect on employment that is more than modest.

But let’s assume that Krueger really means something more substantive – namely, that economists have been wrong to assert that higher legislated minimum wages increase unemployment – and that, therefore, the economists’ case against the minimum wage is without merit. (Again, this meaning is the one that Gertner takes from Krueger.)

Because there are margins other than pecuniary wage rates upon which employers and employees can adjust, it’s possible that higher legislated minimum wages don’t so much reduce employment as reduce the quality of available employment. Most obviously, employers of low-skilled workers can reduce (or not increase) fringe benefits, or they can work their employees harder (thereby extracting more output per hour from them).

If the brunt of employer and employee adjustments to higher minimum wages take place on these non-wage-rate margins, even the finest empirical studies will show little or no effect of higher minimum wages on the rate of employment.

But it would still be a grotesque error to conclude that low-skilled workers are generally better off as a consequence of the higher minimum wage.

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