Minimum Wage and Unemployment

Seventy-five economists, including seven Nobel winners, have signed a letter advocating an increase in the minimum wage. The letter was preceded by a New York Times editorial on January 2 making the same argument. I assume that there will be an opposing letter shortly, probably also including some Nobel signers. These minimum wage campaigns arise from time to time; this exchange is old hat, but worth reviewing briefly.

The Economics

The new letter claims that “... the weight of evidence now show[s] that increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers ... .” Relatively few op-ed readers are economists, but anyone interested in the evidence should consider a 2007 National Bureau of Economic Research (NBER) paper by David Neumark and William Wascher, “Minimum Wages and Employment: A Review of Evidence from the New Minimum Wage Research.” Here is the abstract:

We review the burgeoning literature on the employment effects of minimum wages - in the United States and other countries - that was spurred by the new minimum wage research beginning in the early 1990s. Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries. Two other important conclusions emerge from our review. First, we see very few - if any - studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.

It is not hard to explain to the noneconomist why some studies suggest no effect of the minimum wage on employment. In the past, changes in the minimum wage have been relatively small. Trying to sort out the effects of the increase from everything else going on requires high-powered statistics, and even then the effects can be buried by a host of other simultaneous disturbances and influences.

So, consider the following common-sense thought experiment: Suppose Congress were to enact a minimum wage $50 higher than the current one of $7.25 per hour. Would a minimum of $57.25 reduce employment? I know of no economist who would assert a zero effect in this case, and recommend that readers ask their economist friends about this thought experiment. Assume that the estimate is that a minimum of $57.25 would reduce employment by 100,000. The actual number would be far higher but 100,000 will do for this thought experiment. Now, consider several other possible increases of less than $50. The larger of these increases would have substantial effects, the smaller ones smaller effects.

But is there reason to believe that a minimum of $10 would have no effect? I have never seen a convincing argument to justify that belief. If you accept as a fact that a minimum wage of $57.25 would reduce employment, and you accept as a fact that some workers are currently paid $7.25 per hour, then logic compels you to believe that a small increase in the minimum wage above $7.25 will have at least a small negative effect on employment.

The only escape from this logic is to believe that there is a discontinuity in the relationship between the minimum wage and employment. No one has offered evidence that there is a discontinuity at a certain minimum wage such that a minimum above that has an effect and one below does not.

A wage above $7.25 is readily available to anyone willing to move to low-unemployment area such as North Dakota. Instead of calling for a higher federal minimum wage, why not call for federal assistance helping workers to move to labor-short states?

The Ethics of a Minimum Wage Increase

If you accept that a small increase in the minimum wage will have some small negative effect on employment, then you need to consider the nature of the trade-off involved. Those who remain employed—and most workers will remain employed if the minimum wage increase is small—will enjoy the benefits of the higher wage and will thank the politicians who gave it to them. Those who lose employment will, most likely, not even realize that the minimum wage is the cause. Why? Because most firms will adjust by letting attrition run down staff size. Most minimum wage jobs are in industries with high turnover. Thus, few workers are fired; instead, some are not hired to replace workers turning over. Workers not hired are unlikely to have any idea as to the reason.

Who are the workers not hired? They are the least skilled, most disadvantaged members of society. The bottom line is that those who advocate an increase in the minimum wage are willing to trade the higher wages of those who remain employed for reduced employment opportunities for the least skilled.

I finish with a personal story. I remember my father telling me of an effect from the minimum wage increase from $1.00 to $1.15 effective September 1961. The same legislation scheduled a further increase to $1.25 in September 1963. Dad described how the DuPont Company at that point decided to automate elevators in its office building in Wilmington, Delaware. The old elevators worked fine, but required an operator. Within a short time, all the elevators were automated and the operators of the old ones had no jobs.

Today, even modest increases in the minimum wage will have similar effects. For example, fast-food restaurants will replace order takers with electronic order stations that accept cash and credit cards for payment and relay the orders directly to the kitchen.

I wish it were possible for today’s long-term unemployed to plead with the economists and editorial writers not to advocate a higher minimum wage. Will those advocating a higher minimum wage be willing meet face to face with disadvantaged members of society, who are willing and able to work, and explain why their employment needs to be sacrificed for higher wages for those who remain employed?