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Maximum Insight Into Minimum Wages

Posted By Don Boudreaux On December 5, 2013 @ 2:59 pm In Seen and Unseen,Work | Comments Disabled

My GMU Econ colleague Bryan Caplan offers yet another useful perspective on minimum-wage legislation [1] – that is, legislation that makes it unlawful for anyone to work for pay who cannot persuade employers to hire him or her at wages at least as high as the legislated minimum.  Bryan’s post explains the political cleverness of minimum-wage proponents who typically argue for phasing-in their desired increases in minimum wages.  His post also explains that data on the employment consequences of phased-in (or announced-signifiantly-ahead-of-time) minimum-wage hikes might reveal these employment consequences to be smaller than they really are.

Here’s a slice from Bryan’s post:

If the minimum wage unexpectedly jumped to $12 today, the effect on employment, though relatively small, would be blatant.  Employers would wake up with a bunch of unprofitable workers on their hands.  Over the next month or two, we would blame virtually all low-skilled lay-offs on the minimum wage hike – and we’d probably be right to do so.

If everyone knew the minimum wage was going to be $12 in 2015, however, even a large effect on employment could be virtually invisible.  Employers wouldn’t need to lay any workers off.  They could get to their new optimum via reduced hiring and attrition [2].  When the law finally kicked in, you might find zero extra layoffs, because employers saw the writing on the wall and quietly downsize their workforce in advance.

Bryan is correct.  And not only might a minimum-wage hike that was anticipated not result in any observable layoffs at the time it kicks in, but also the unemployment rate of low-skilled workers might not jump noticeably or detectably as a result of the higher minimum wage.  The reason is that, once employers anticipate the looming hike in the minimum wage, they then – before the actual hike - start trimming their workforces (probably mostly through attrition and reduced hiring).  Some, perhaps many, low-skilled workers, discouraged by the increasing difficulty they face when searching for jobs, respond by dropping out of the workforce before the minimum-wage hike actually happens.  By the time the minimum-wage hike does occur, the resulting increase in the measured rate of unemployment of low-skilled workers might well be genuinely small.

UPDATE: In a comment on Bryan’s post, Santiago points out the germane fact that

This would apply to Card and Krueger as well, the legislation in NJ was passed in 1990 but the increase didn’t take place until 1992.

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[1] My GMU Econ colleague Bryan Caplan offers yet another useful perspective on minimum-wage legislation: http://econlog.econlib.org/archives/2013/12/phase_in_a_psyc.html

[2] get to their new optimum via reduced hiring and attrition: http://www.nber.org/papers/w19262

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