The Wages of the Minimum-Wage

by Don Boudreaux on January 26, 2007

in Regulation, Seen and Unseen, Work

Gary Becker and Richard Posner offer, in today’s edition of the Wall Street Journal, a clear explanation of the perils of minimum-wage legislation.  Here’s the economic logic, tidily summarized:

An increase in the minimum wage raises the costs of fast foods and
other goods produced with large inputs of unskilled labor. Producers
adjust both by substituting capital inputs and/or high-skilled labor
for minimum-wage workers and, because the substitutes are more costly
(otherwise the substitutions would have been made already), by raising
prices. The higher prices reduce the producers’ output and thus their
demand for labor. The adjustments to the hike in the minimum wage are
inefficient because they are motivated not by a higher real cost of
low-skilled labor but by a government-mandated increase in the price of
that labor. That increase has the same misallocative effect as monopoly

And here are these scholars’ thoughts on the empirical evidence:

Some economists deny that a minimum wage reduces
employment, though most disagree. And because most increases in the
minimum wage have been slight, their effects are difficult to
disentangle from other factors that affect employment. But a 40%
increase would be too large to have no employment effect; about a tenth
of the work force makes less than $7.25 an hour. Even defenders of
minimum-wage laws must believe that beyond some point a higher minimum
would cause unemployment. Otherwise why don’t they propose $10, or $15,
or an even higher figure?

A number of countries, including France, have
conducted such experiments; the ratio of the minimum wage to the
average wage is much higher in these countries than in the U.S.
Economists Guy Laroque and Bernard Salanie find that the high minimum
wage in France explains a significant part of the low employment rate
of married women. Mr. Salanie has argued that the minimum wage also
contributes to the dismal employment prospects of young persons in
France, including Muslim youths, an estimated 40% of whom are


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