Raise the Minimum Wage?

by Don Boudreaux on December 5, 2005

in Myths and Fallacies, Prices, Regulation

Jared Bernstein, senior economist at the Economic Policy Institute, wants government to raise the legislated minimum wage. Here’s his letter in today’s New York Times:

To the Editor:

Implicit in "Union Claims Texas Victory With Janitors" (front page, Nov. 28) is the need to raise the federal minimum wage.

An executive of the Houston Building Owners and Managers Association is quoted as saying that the hourly pay of janitors in Houston is "generally above the minimum wage." According to the article, Houston janitors typically earn $5.25 an hour, a dime above the national minimum. The article also cites a worker who says she has not had a raise in eight years. It’s no coincidence that the last federal minimum wage increase was eight years ago.

In other words, there are still employers who set the wages for adult workers in real jobs based on the minimum.

Unless Congress stops ignoring this reality (and in the absence of successful organizing drives), these workers – millions of whom toil in our low-wage sectors – will be consigned to working poverty.

Jared Bernstein

Bernstein reads as evidence of the minimum-wage’s effectiveness the fact that many low-wage workers "typically" earn an hourly wage just about equal to the legislated minimum. So he reasons (I guess) that raising the legislated minimum will raise the wage that all currently employed low-wage workers typically earn.

But his reasoning is wrong. First – and less interestingly (if not less importantly) for those who know economics – wages are earned only by workers with jobs. To the extent that the minimum wage puts some workers out of work, the zero "wages" earned by the newly unemployed workers won’t show up in wage statistics – and these unfortunate victims of the minimum wage will be made worse off but be invisible to Mr. Bernstein.

Second, it’s hardly a surprise that the wages of many low-skilled workers hover around the legislated minimum. To see why, do the following mental experiment:

Suppose there are six classes of workers, ranging in skill from "very high" to "un." Skill group 1 has the highest-skilled workers (neurosurgeons and the like) while, at the opposite end of the spectrum, skill group 6 has the lowest-skilled workers (such as janitors and hotel maids).

Suppose that without minimum-wage legislation the equilibrium hourly wage for each skill group is as follows:

1: $500

2: $100

3. $20

4. $5

5. $4

6. $2.50

Now impose a minimum-wage of $5.15 per hour. What happens?

Employers of workers in skill-groups four, five, and six will reduce the quantity of work-hours they buy from these workers. This reduction in work-hours hired will occur until the marginal value per hour of workers hired rises to at least $5.15.

Hourly wages paid to workers in skill-groups four, five, and six will then be at or very near the legislated minimum wage.

(Incidentally, because skill workers are often substitutes for larger-numbers of unskilled workers, a legislated minimum wage likely increases demand for workers in skill-group three, thereby increasing the wages earned by these workers.)

Bottom line: Bernstein is correct to suggest that the legislated minimum-wage plays a large role in determining the "typical" wage paid to low-skilled workers. But the way that it plays this role – by reducing employment opportunities (and/or by decreasing the quality of the work-experience for these low-skilled workers) — is hardly a reason to endorse the minimum wage and to call for it to be raised.


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