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Understanding the Minimum Wage

Here’s a letter to the Wall Street Journal:

Kudos to George Mason University economics PhD student Liya Palagashvili and to her GMU econ undergraduate student Rachel Mace for exposing the flawed analyses of those who contend that recent hikes in some states’ minimum wages resulted in especially strong job growth in those states (“Do Higher Minimum Wages Create More Jobs?” August 21).

Yet another point deserves mention, one that I’m sure Liya and Rachel would have addressed had space allowed. Even if (contrary to Liya’s and Rachel’s finding) states that raised their minimum wages did indeed enjoy higher employment growth than did states that did not raise theirs, the foundational economic argument against the minimum wage still stands. That argument is that the minimum wage reduces the employment prospects of the lowest-skilled of low-skilled workers. It’s possible that raising the minimum wage attracts into the labor market so many employable higher-skilled workers, such as recent retirees, that the effect on overall employment is positive (or not negative) even though – as economics warns – many low-skilled workers are nevertheless pushed into the ranks of the long-term unemployed.

In short, the central economic argument against the minimum wage is not that it reduces overall employment (although it likely does); rather, it’s that the minimum wage reduces the employment prospects of the people most desperately in need of jobs: workers with the fewest job skills.

Donald J. Boudreaux
Professor of Economics
Martha and Nelson Getchell Chair for the Study of Free Market Capitalism at the Mercatus Center
George Mason University
Fairfax, VA  22030

Liya (who received a scholarship in high school funded by my great colleague Walter Williams, who also was one of her professors at GMU) was a GMU econ undergrad.  She’s now one of our many excellent PhD candidates, as well as a PhD Fellow at GMU’s Mercatus Center.  Earlier this summer – back in Fairfax during a break from her fellowship at NYU’s Classical Liberal Institute – Liya taught an intermediate-microeconomics class at GMU and discovered there another promising young undergraduate student, Ms. Rachel Mace.  Ms. Mace wrote a paper (as a writing assignment) for Liya’s class.  That paper, along with other insights brought by Liya, resulted in their excellent essay in today’s WSJ.

Liya and Rachel aren’t the only GMU students with articles in today’s Wall Street Journal.  The Cato Institute’s Dan Mitchell – who earned his graduate degree in economics from GMU several years ago – has this nice article in today’s edition.