Do minimum wages cause unemployment?

by Russ Roberts on February 27, 2006

in Cafe Conversation

We’re adding a new category today, Cafe Conversation.  The idea is to present a puzzle, let you, the readers comment on the puzzle, and then later in the week, I’ll post the most interesting response or responses and add some comments of my own.

A reader wrote Don and me wondering whether the minimum wage causes unemployment:

I decided to look up some statistics on my own. Here are two sites I found:

http://www.dol.gov/esa/minwage/america.htm
http://money.cnn.com/pf/features/lists/state_unemployment/

Comparing these, I was disappointed to find that many of the states without minimum wage laws have fairly high unemployment, and the state with the lowest unemployment rate, Hawaii, has a minimum wage higher than the federal rate. Obviously I’m not foolish enough to think that the sole factor contributing to unemployment is wage rates, and obviously this doesn’t even approach a scientific study, but it was a pattern I didn’t expect to find. Any thoughts on the issue?

Have at it, folks.

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{ 49 comments }

Eric H February 27, 2006 at 10:55 am

Do you have similar data on labor market participation? According to friends who live there, the unemployment in Kauai especially is supposedly very high – like 40% – leading to lots of problems including high burglary and meth making/dealing. Perhaps these don't show up because they aren't included in the figures?

mark adams February 27, 2006 at 11:15 am

In a similar vein to Eric, presumably not everyone who is jobless is classed as unemployed. For instance, states with a high minimum wage might also have high disability benefits encouraging people to register as incapacitated. They might also encourage people to stay longer in education. Both these things would reduce the unemployment rate.

There is also the question of what proportion of people are employed by the state.

Finally. Is it possible that low skilled workers leave states with a high minimum wage to live in states where they can get work?

Don February 27, 2006 at 11:18 am

The overall unemployment rate is not the rate to look at. If you could get a look at stats broken out by age and possibly education these would be more revealing. The truth is that most of us earn well above minimum wage. People who earn minimum wage are youngsters and those without skills, which tend to be those without much education. Minimum wage laws should show up as higher unemployment among those under 20 years of age and within, say, a high school education. Also, minimum wage laws discourage employment of a marginal second earners, or people who just want to bring in a few extra bucks but aren't committed to the work force. So the percentage of dual incomes per household might tell a story too.

Finally, my state, New York, has a middling unemployment rate and a higher minimum wage than federal. While we are not in disastrous straits, New York was once the economic engine of the country and it now has a boom and bust economy tied to the financial services industry. We've driven away all manner of manufacturing and basic industry. New York is a net exporter of people too, which actually makes the unemployment rate look better, but losing people is never a good sign for an economy.

Steven Bass February 27, 2006 at 11:25 am

It seems entirely possible that the stated effect can be attributed to reverse causality. Instead of high minimum wages causing low employment, it's likely that low employment instead causes higher minimum wage rates. If, instead of looking at the United States specifically, we looked at the nations of the world, I'd suspect that richer nations would tend to have higher minimum wages precisely because it's a luxury that comes with wealth. I'm reminded of something one of my college professors said when asked why post-Communist countries should eliminate trade barriers when the United States was doing just fine with significant barriers in place. He responded, "The United States is a wealthy nation, and so it can better afford to do stupid things."

TJIC February 27, 2006 at 11:28 am

My immediate assumption is that minimum wage laws hamper employment at the margin.

Imagine one state with high labor demand, tight labor supply, and high wages. Politicians can pass a feel-good minimum wage law that does very little, and garner great press.

No imagine another state with low labor demand, high labor supply, low wages, and noticeable unemployment. Any attempt to raise the minimum wage even a bit will be met with employers telling both employees and politicians "raise it ten cents, and I start firing people" – all of this delivered with the cold hard steel of a truthful assertion.

In the latter case, politicians might move on to policies that caused less IMMEDIATELY VISIBLE damage, or was less obvious.

CG February 27, 2006 at 11:31 am

From a public choice perspective, I suspect high minimum wage laws follow full employment, and not vice versa — just as jackals follow a healthy herd of antelope.

Christopher February 27, 2006 at 11:50 am

Well, I would imagine that if the prevailing wages are above the min. wage, then the latter is somewhat moot?

Jeremiah February 27, 2006 at 1:24 pm

States that have large numbers of jobs that are dependent on unskilled workers stand to lose the most with a minimum wage, which is why they have a lower minimum wage. By nature, however, these low-skill jobs have high turnover which inflates the unemployment stats. Perhaps it may be more telling to look at how long those who are unemployed stay unemployed.

Saulius Muliolis February 27, 2006 at 1:53 pm

I once looked up some statistics about minimum wage, too. It turns out that in America, the minimum wage affects only a small fraction of a percent of the workforce. Very few people at all earn that small amount of money, so if you raise the minimum wage, only a very tiny percent of the population will be affected. Other factors, such as high taxes and regulation, are probably at work.

CG February 27, 2006 at 2:16 pm

"Well, I would imagine that if the prevailing wages are above the min. wage, then the latter is somewhat moot?"

Not at all. If, say 97, percent of workers are earning more than the new proposed minimum wage, they can still benefit by driving some portion of the remaining three percent out of work. If the skilled workers succeed at this, their own value is marginally enhanced. Thus, the strongest support for minimum wage increases is often found among higher wage earners who are not *directly* effected by the increase, but who nevertheless benefit indirectly.

Think of it this way. Whom do you expect to oppose "oppressive" wages in 3rd world sweat shops, the low-wage workers (who are enjoying the best job available), or the high-wage, employees of a competing firm, who hope to see their low-wage competition disappear?

spencer February 27, 2006 at 2:25 pm

Saulius — you are right, but the data is a little larger then you state . In 2004,
the last year for the data 1.6% of the labor force worked at or below the minimum wage. This ratio has been falling sharply since 1980 when it was 8.8% of employment –
this is far back as my data goes.

Interestingly, the only years minimum wage employment increased were years that the minimum wage was raised. Probably stems from some form of wage compression after the rise inthe minimum wage.

Probably what you would find when you look at the states with a minimum wage above the national average is that these are both the wealthiest and the most expensive states.
Consequently, the comparisons of the nominal wage data alone probably contains very little information of value. You would probably have to transform the data in some manner — the state minimum wage as a % of the state average wage, for example — to make meaningful comparisons.

Just off the top of my head I would bet that you find the Southern states that are trying to follow a cheap labor growth strategy with have the worse data.

John Dewey February 27, 2006 at 2:31 pm

Saulius,

The U.S. Bureau of Labor Statistics provides data about minimum wage earners:

http://www.bls.gov/cps/minwage2004tbls.htm#3

As you can see, 2.7% of hourly workers in the U.S. earn at or below the minimum wage of $5.15. Note, though, that the percent rises to nearly 5% in a handful of states. The cost of living in those states is very low, and the current minimum wage of $5.15 is a livable wage for a two-income family.

Senators from California, Massachusetts, Maryland, and other high wage states can easily support raising the minimum wage. Higher minimum wages will cost high-wage states nothing directly. Raising wages in low-cost states does decrease the burden on bloated businesses in the high-cost states. It's not surprising that Senators Kennedy (MA), Mikulski (MD), and Feinstein (CA) favor a higher minimum wage, and Senators Hutchison (TX), Coburn (OK), and Domineci (NM) do not.

spencer February 27, 2006 at 2:32 pm

By the way, there is a new study of the Sante Fe living wage experiment that finds it did cause a drop in average hours worked, but not employment.

http://www.epionline.org/study_detail.cfm?sid=90

John Dewey February 27, 2006 at 2:47 pm

Spencer,

The link you provided includes this conclusion:

"Overall, the results of this complete economic analysis show that the living wage in Santa Fe had an indisputable negative effect on the labor market. As a result of the increase in the wage floor, unemployment is significantly increased in the city and individuals who were able to keep their jobs are being forced to work fewer hours. "

The page you referenced points out that focusing on overall employment is "a faulty analysis that fails to control for factors such as overall economic growth in the state or a growing population."

I think the results of the Santa Fe Living Wage experiemnt are clear: higher minimum wages kill jobs of those with the lowest skill levels.

spencer February 27, 2006 at 3:14 pm

I suspect we have not seen the final word on the Senta Fe experiment.

I see some open questions in the authors approach.

But after the back and forth earlier on this subject I though the study would be of interest.

save_the_rustbelt February 27, 2006 at 3:17 pm

Both sides of this tend to assert cause-and-effect relatiosnhips without much evidence.

One problem in gathering the evidence is that every economic situation is different, e.g. 2005 is different than 1995 which is different than 198, etc.

And the wild card is 6 or 7 million illegals, many working at minimum or less because they cannot call wage-and-hour when the labor bosses cheat them.

Brock Haussamen February 27, 2006 at 3:56 pm

As I see it, the conclusions here are that the direction of cause and effect is complex and that economies in different places and times vary significantly insofar as the minwage impact goes. I would agree and argue that minwage critics overgeneralize when they claim that a minimum wage hike is bad for employment. So, let's raise it.

And those small numbers of people making the minwage or less? Look instead a little bit _above_ the minwage ($5.15-$6.15, for example) and I'll bet the number grows quickly.

A plug for my Web site: "Raising the National Minimum Wage: Information, Opinion, Research" at http://www.raiseminwage.org.

Brock Haussamen

Toni February 27, 2006 at 4:07 pm

Why don't you check this (http://www.oecd.org/document/62/0,2340,en_2649_37457_31935102_1_1_1_37457,00.html) OECD study for a wider view than just the US. Minimum wages are stastically the most predictive factor of the unemployment rate. I believe in the US the actual effective minimum wage (including all costs, like job safety, health etc) is pretty much federal, so the state-mandated nominal minimum wage doesn't tell much.

John Dewey February 27, 2006 at 4:10 pm

Rustbelt,

Are you sure illegal aliens are making less than minimum wage? My brother tells me that Mexican construction workers make more than minimum wage. He's in a position to know. I've been told that many illegal aliens acquire not-so-legal documentation that allows them to work in legal jobs covered by minimum wage laws.

One very nice thing about a free market is that a worker can find another job whenever he feels the "labor bosses" are cheating him. The fact that Mexicans continue to move north indicates they do not feel cheated.

I suspect it is only the rustbelt unions who really feel cheated by the free market.

Rick K February 27, 2006 at 5:25 pm

My guess is that a higher demand for labor preceded higher minimum wage laws passed in these states. In other words, higher minimum wages laws passed in these states because they could. The prevailing wage rate was already higher then the newly enacted statutory minimum.

Swimmy February 27, 2006 at 5:53 pm

An important consideration in this is the *cost of living* in each state as well. My intuition is that if the cost of living in a particular state is lower than the average, the wage rates in that state will also be lower. Therefore, minimum wage will do the most damage in those states which have a lower cost of living and little in those states which have a high cost of living.

Survey says?

http://www.infoplease.com/ipa/A0883960.html

It's not completely determinate, but there's certainly some evidence for this. Note that the cost of living in Hawaii is very large; wage rates are probably higher and the minimum wage doesn't matter. Note also the cost of living in some of the states with more unemployment – Mississippi, Michigan, Ohio, Louisiana – are just a little below or a little above the average.

This is hardly true universally, though. Alaska has a relatively high standard of living and unemployment. (Its minimum wage is higher than the federal). The same is true for D.C. And this isn't a scientific study in any way – I'm using the cost of living in major cities of several states, not the average for the entire state. This probably inflates it quite a bit. I was unable to find a rank of the cost of living per state or per smaller towns in states. I know it's out there, though.

So. That's something.

John Dewey February 27, 2006 at 6:00 pm

Swimmy,

I agree that the higher minimum wages are found in higher cost states. But I suspect labor unions are behind much of it. As I suggested earlier, the reason high cost states want a higher national minimum is to raise the costs in states not controlled by unions. Their senators don't care about the minimum wage workers in Texas, Alabama, and South Carolina. They just want to stop the exodus of jobs from their states.

John Pertz February 27, 2006 at 6:12 pm

The minimum wage is a product of failure. The rhetorical ends that the min wage supposedly strives to achieve is to increase the living standards of the working poor at the expense of capitalists. Democracy is probably the worst of all government types to try and achieve such stated ends. This is so because in order to properly figure out what businesses are profitable enough to pay more then a large degree of government regulation is required. Government auditors would have to consistently inspect the books and such policy would not only be cumbersome and economicaly irrational but most importantly politicaly impossible. Imagine a congressman trying to propose legislation that was that intrusive. Therefore, because of democracies failure to produce legislation of such a facist and toltalitarian nature we are left with the cop out that is the min wage. An extraordinarily weak piece of legislation cooked up by legislators as a tool to earn votes from the working poor. The worst part is that not only does it have zero positive effect for anyone, it is actualy harmful to society. It raises the price level and reduces the numbers of hours worked. A great example of why democracy and capitalism are probably not compatible in the long run.

Travis Snyder February 27, 2006 at 6:15 pm

Here is some info that might be helpful:

http://www.neoperspectives.com/minimumwage.htm

I think you might find correlations if you looked at black teenage unemployment and state minimum wage laws.

Swimmy February 27, 2006 at 6:16 pm

I didn't say that minimum wages are more common in higher cost states (though this seems to be the case) – I said they do the least damage there because the real wage rates are likely to be naturally higher. In lower cost states, the real wage rates are likely lower and even the federal minimum wage can cause more unemployment than a higher minimum wage in a high cost state.

In which case, you're correct. We would find industries and unions in higher cost states advocating a higher minimum wage because it will do them minimal damage, but it will force many competitors in lower cost states out.

Again, I'm not sure if the data actually supports this. Wouldn't surprise me to find there's a study or two out there.

Swimmy February 27, 2006 at 9:28 pm

And indeed there is. Though I can't find the study itself on the internet, it's called "Minimum Wages and the Distribution of Economic Activity" by Marshall Colberg. I don't know how much of it has been verified by the data. Colberg's research seems to be entirely on senator votes, not on the specific effects of the minimum wage in low and high cost cities.

GMU's own Thomas Rustici covers the argument in this paper:

http://www.cato.org/pubs/journal/cj5n1/cj5n1-6.pdf
(PDF)

johnny bonk February 27, 2006 at 10:28 pm

Dudes,
Everyone is forgetting that the labour markets in the high wage West are massively out of equilibrium, so the self evident truth that minimum wages reduce labour demand do not really apply.

There are literally hundreds of millions (billions even?) of workers who would come to the West to work if they were permitted to, however immigration restrictions mean they cannot.

Most Western countries have a minimum wage, all have some unemployment and all would be able to find work for many more immigrants if they were permitted to come – this is true in countries with "high" unemployment (France, Germany etc) and countries with "low" unemployment (UK, USA etc).

Trivially, a minimum wage would reduce the number of immigrant workers in an "open borders" labour market, but there are no such labour markets so the question is moot.

Unemployment in the West is best explained by cultural resistance to "crap" jobs, which may be (is) a function of welfare and general prosperity.

Raising the minimum wage may reduce the availability of easy jobs, but there is a massive surplus of (low paid) work in most of the West (ask a Mexican / Pakistani / Morrocan / Turk / Nigerian etc etc).

Minimum wages surely reduce labour demand, but the actual demand is in fact vastly greater than supply – people don't want the work, so the jobs never even get conceived (until the immigrants arrive).

The problem in the West (for its indigenous workers) is thus little to do with minimum wages, but the much more difficult task of creating (the conditions conducive to business creating ) enough well paid work, though this is of course a moving target that can never be quite achieved.

econgeek February 27, 2006 at 10:29 pm

The standard reference in the empirical literature is;

Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania
David Card; Alan B. Krueger
The American Economic Review, Vol. 84, No. 4. (Sep., 1994), pp. 772-793.
http://links.jstor.org/sici?sici=0002-8282%28199409%2984%3A4%3C772%3AMWAEAC%3E2.0.CO%3B2-O

Card and Kruger are not exactly amateurs in labour economics and this is as close to a natural experiment as we have.

In general the empirical findings of the better studies can be characterized as follows;

- it is very hard to find an effect on employment at the micro level

- it is very hard to find an effect on unemploment at the agregate level

In terms of the theoretical literature, Akorlof on labour contracts as partial gift exchanges is interesting.

If you are wondering about just how irational someone might be with rewards to their own sweat, then;

Is Tomorrow Another Day? The Labor Supply of New York City Cabdrivers, HS Farber – Journal of Political Economy, 2005

is the paper for you.

econgeek February 27, 2006 at 10:34 pm

Also with rewards to the above,

Labor Market Institutions and the Distribution of Wages, 1973-1992: A Semiparametric Approach – J DiNardo, NM Fortin, T Lemieux – Econometrica, 1996

is very good (pretty pictures!), in general the minimum wage seems not to matter much.

– Note all the studies above are with the idea of a developed country labour market in mind. The effects in developing country labour markets are likely to be far stronger as well as more strong redistributive between workers.

the Radical February 28, 2006 at 2:24 am

I think that the analysis of min wage laws needs to take into account their effect on what those most strongly advocate such policy really intend. Min wage laws are perhaps one of the greatest examples of rent seeking. The most ardent supporters of min wage are unions, not because they care about unskilled workers but because they care about themselves. To unions, min wage drives up the price of substitute goods (unskilled labor) in order to make their products ("skilled" labor) relatively more affordable.

We of course know that unions cut off their own legs by driving the price of union labor far above its actual market value. We need only to look at recent cuts at Ford and GM for proof of this (here in Northern WV there are weekly announcements of layoffs at the many sites where unions not long ago declared "victorys"). Min wage is an attempt to stave off this inevitable outcome.

Thus a critical question to be asked in the process of understanding the effects of min wage is whether min wage increases the number of union members employed in areas with such laws. This is of course only a piece of the puzzle but I think it an important one.

Russell Nelson February 28, 2006 at 2:54 am

Nobody has yet pointed out that minimum wage laws are only raised long after most people are earning a higher than minimum wage. Consequently, very few jobs are affected by a minimum wage increase. What does that mean?? SMALL SAMPLE SIZE! So if you're trying to find a minimum wage effect from a small increase in the minimum wage, stop looking. Instead, try doubling the minimum wage and see if minimum wage laws don't increase unemployment. Just, please, don't run that experiment in my state? Okay? Thanks.

Russell Nelson February 28, 2006 at 3:00 am

Unfortunately, I cannot find the reference again, but a decade or so ago I was trying to resolve this question for myself. I came across a reference to the Haitian lace industry being destroyed by a minimum wage law which inadvertantly doubled the minimum wage in Haiti. If you Google for Haiti+lace+minimum+wage, the only online reference you can find is me referring to the offline reference. Sigh.

Don February 28, 2006 at 9:55 am

I'm sure Russ will mention this, but the Card & Krueger fast food study has been credibly called into question if not entirely discredited.

liberty February 28, 2006 at 11:40 am

The aggregate unemployment figure is very broad and encompasses many factors – tax rate, industries in the state, manufacturing vs. services, etc. It is imporant to look at different productivity levels and longitudinal data. If you can follow the bottom quintile of wage earners from before to after a hike in the minimum wage, you could see whether they simply earned more after or whether they lost their jobs; you could see whether there was an influx of new labor into the market, perhaps more highly trained workers willing to work for the higher wage; you could see whether small businesses went under and if you followed those entrepreneurs with the longitundianl study you could see whether they moved to another state or attempted a new kind of business or joined the labor force as skilled labor.

Studies have done some of this but there is a lot left to be done. Recently Santa Fe introduced a "living wage" and some studies have tracked the outcomes of people there.

http://www.epionline.org/study_detail.cfm?sid=91

John Dewey February 28, 2006 at 2:00 pm

Swimmy,

Thank you! The CATO article is excellent!

I was especially pleased to see that Jack Kennedy in 1954 was very open about his motive for favoring a higher minimum wage: to protect Massachusetts industry. By contrast, little brother Ted continues the hypocritical claim that he only wants to help the poor through a $7.00 minimum wage.

spencer February 28, 2006 at 4:01 pm

the Radical — If the unions are what are driving GM out of business why is it that the competition in Germany and Japan are also unionized? In Germany the Union even have a seat on the Board of Directors.

You are saying that unionized firms are driving unionized firms out of business because they are unionized. That seems to be a little hard for me to follow.

John Dewey February 28, 2006 at 4:15 pm

Spencer,

Though I agree with most of Radical's arguments, I think you are right about the auto unions. Here's an article pointing out that 79% of Toyota's North America vehicle production is in No-Right-To-Work states:

http://tinyurl.com/gd9ax

In my opinion, Toyota produces better-engineered vehicles with more excuiting designs. Except for the Mustang and the Avalanche, Detroit's models seem boring to me.

deb February 28, 2006 at 11:12 pm

Mazel tov on viewing the question of the relationship between minimum wage and unemployment as an empirical question! You might want to have a talk with Arnold Kling who still believes in faith-based economics:

http://www.tcsdaily.com/article.aspx?id=022806E

"…..standard economic analysis, which predicts that putting a high floor under wages causes excess supply of labor — in other words, unemployment."

According to Arnold, people who don't take it on faith that minimum wage laws are bad suffer from a "Moses complex."

John Pertz February 28, 2006 at 11:39 pm

Spencer, you and liberty are both correct but clarification is neaded to prove why. Liberty is arguing that the GM'S unions are driving it out of business. This point is true but another point needs to be made first. First and foremost, GM is strugling because of diminished sales stemming from the fact that their foriegn competitors sell better products. The foreign competitors are also uising unionized labor, however, the unions are not killing them because they are making money. This is why Unionism works much better in an environment of protectionism and why many people on the left are afraid of globalization because of the competitive presures that is applies to industry. Competition should be regaurded as enemy number one to unions because they promote uncertainty where a non competitive, heavily regulated economy tends towards less instability.

the Radical March 1, 2006 at 12:36 am

"You are saying that unionized firms are driving unionized firms out of business because they are unionized."–Spencer

No, I'm saying that unions are driving unionized firms out of business. The fact that the competition is unionizd as well makes no difference. Unions tear down the structure of unionized firms from within, the competition merely bulldozes the rubble away. As John Dewey pointed out, Detroit isn't producing models that people want to drive. This alone, however, is not what is doing these companies in. Millions of people will still buy anything with a traditional American brand name out of sheer blind nationalism. As this article points out
http://www.freemarketproject.org/news/2006/news20060125.asp
it is the fact that Ford and GM have far higher union-imposed costs than their competitors that is killing their bottom line.

If Ford and GM had labor-cost structures that were driven by markets instead of by government backed extortion they would be in a far better position to absorb and recover from the effects of making an unappealing product. As it stands, by forcing their employers into paying hundreds of millions of $$ a year for people not to work on top of demanding wages inflated far above market rates, unions at Ford and GM are issuing their own layoff notices.

Though I was using these auto makers as only a few examples from recent national headlines my argument holds for them as well as other unionized industries. As I said before, unions cut off their own legs by driving the price of union labor far above its actual market value. No firm can sustain long term profitability if they are paying far-above-market rates for any part of their factors of production. Markets prices represent market realities and reality is not optional.

Russell Nelson March 1, 2006 at 12:53 am

deb– it's not a question of accepting the conclusion on faith. It's a question of saying "big minimum wage increases cause big unemployment; little increases cause invisible unemployment." The unemployment is there; thankfully it's so small that it hides among the employment caused by other things.

But you don't have to take me on faith. If you are a wage-earner, you can run your own experiment. Give yourself a minimum wage increase. Tell your boss that you have decided that you need a minimum wage of $13/hour. He can either pay you that wage, or fire you.

Do you think anything different would happen if a government law was enacted rather than a deb law?

Henri Hein March 1, 2006 at 2:09 am

Several people have commented that minimum wage always cause unemployment. Perhaps 'at the margin,' or perhaps, as the last post states, "little increases cause invisible unemployment."

This doesn't make any sense. To see why, let's do a thought experiment.

Economists like to point out to progressives that if the minimum wage is so wonderful, why not increase it an order of magnitude? Why not make it $50?

Try that in the opposite direction. What if the minimum wage was an order of magnitude smaller, at $0.50? At that level, the minimum wage would have no impact on employment, at the margin or anywhere else.

I live in California, where the minimum wage is $6-$7.50 (it varies a bit with parameters I never quite deciphered). When I pick up day workers to work in my yard, they ask $12-15.

These guys have no education and offer no particular skills. Some of them don't even have legal status or speak English. Yet, they ask twice the minimum wage. I don't mean "ask" as in "would like," I mean as in "won't work for less." (On a different note, they work hard and are worth the money).

It's hard to imagine the CA minimum wage having any effect.

I didn't read all the links posted to the various studies, but I can't help guessing that the level of minimum wage is somewhat related to welfare coverage, in the sense that governments supporting one is likely to support the other. Sorting out what unemployment was caused by minimum wage, and what was caused by welfare, strikes me as an extremely difficult excercise. Both artificially raise the cost of labor.

JohnDewey March 1, 2006 at 7:57 am

Radical,

Should we really place blame on the unions? I think GM and Ford negotiators agreed to outrageous union demands in good times and in bad. They traded long term, unsustainable cost structures for short term worker harmony, and presumably for short term executive bonuses.

I agree that union leaders are ruthless in their attempts to gain everything possible for their workers. But that's their job. I think it's the job of management to hold the line when demands clearly threaten a firm's survival.

deb March 1, 2006 at 9:36 am

Russell: If you are a wage-earner, you can run your own experiment. Give yourself a minimum wage increase. Tell your boss that you have decided that you need a minimum wage of $13/hour. He can either pay you that wage, or fire you.

The way you test a hypothesis like "Laws establishing minimum wages increase unemployment" is to compare places where such laws exist to places where they don't. As Don notes, when you crunch the numbers, they doesn't support the faith-based economists' claim.

An individual setting her own "minimum wage" and telling her boss would not be a very good way to test the hypothesis about minimum wage laws. But keep trying – you'll get the hang of empirical hypothesis testing if you keep at it!

Swimmy March 1, 2006 at 10:58 am

deb:

This is simply a thought experiment. No numbers have actually been crunched here. However, you are right; it is an empirical question. Just, you know. Not one that can be answered with the provided data. At all. (As several commenters and the original email already pointed out.)

Swimmy March 1, 2006 at 1:11 pm

Furthermore, Russell's hypothesis testing is actually quite relevant. That situation – and every other imaginable situation – proves that *demand curves slope downard*. This is unquestionable, a settled matter of science for which endless literature could be called upon.

What research of the minimum wage tells us is not whether or not it causes unemployment at all (because we know it does), but the degree to which unemployment rises relative to the degree to which the wage rises. In other words, it tells us just how steep or flat is the demand curve for labor. (And yes, the hypothesis that small increases in it don't do much damage is tenable.)

the Radical March 1, 2006 at 3:58 pm

John Dewey,

I agree that the blame doesn't entirely fall on the unions and that caving into unsustainable demands is manigerial irresponsibility. I also think that much of the blame goes to politicians who have made the unions virtually untouchable. It amazes me that if I agree to work for $12 an hour and later decide that I won't do the work I agreed to do at $12 for less than $15 an hour its called quitting and my boss simply finds someone else. (where I live people would line up around the block twice for $12 an hour) If me and all my union buddies at work decide the same thing, however, its called a 'strike' and the federal government forces my boss to negotioate a deal that usually ends up screwing him as well as my fellow "brothers" and I. Wal-mart has the right idea: better to shut down then unionize.

John Dewey March 2, 2006 at 10:55 am

Radical,

I agree that union-bought politicians share the blame for the plight of highly unionized companies now in trouble. But all politicians are not the same.

The tide turned for the unions about 1981, when one politician stood up to the Air Traffic Controllers. Deregulation of industries (championed by politicians), right to work laws (enacted by politicians), and globalization are slowly reining in union power. We won't be able to blame the unions much longer if our domestic factories remain uncompetitive.

anon April 25, 2006 at 1:34 am

A person making and living on the mimimum
wage in the US is currently living far below the poverty line. Many of these folks require public assistance to live, especially in very expensive health care.

A marginal increase in minimum wage is like a tax rebate. We can probably assume that 100 % of the marginal increase in the minimum wage will be spent on consumption. The cost of the wage increase may be born through slightly higher prices, where producers have the power to pass on the increased costs, and possibly by the investor class through slightly reduced returns.

An equally likely outcome is that the extra income will be spent on goods in which the marginal cost of production decreases with higher unit demand (economies of scale), completely offsetting the marginal increase in labor cost. There may also be an offsetting benefit to society in reduced cost for public assistance.

A potential long term benfit would be enhanced future prospects for the children of minimum wage workers, who may increase their future productivity as a result of slightly higher family income.

Union wages in the former US allowed the rise of the baby boom-bearing middle class, whose children went to college and ultimately resulted in the wealthiest, most advanced society the world has ever known.

If one considers the polarization or concentration of income a good thing, there are plenty of examples just south of the US, and other places in the world, in which extreme wealth concentration is a net negative.

The US has not increased the minimum wage for many years. The case can be made that the marginal benefits are considerably higher than the marginal cost of a $1.00 increase in the minimum wage.

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