Tuesday, October 25, 2011

Minimum Wage

Do minimum wage laws affect the unemployment rate?  Here are some comments from teachers and an economist who have been thinking deeply about the subject.

Greg Mankiw writes that there are startling changes in the the data.  From his blog,

  • The percentage of all hourly-paid workers paid at or below the minimum wage rose from 2.3 to 6.0 percent.
  • The percentage of part-time workers paid at or below the minimum wage rose from 5 to 14 percent.
  • The percentage of teenage workers paid at or below the minimum wage rose from 7 to 25 percent.
Steve Latter writes:

From my perspective there is no clear answer although, from the articles I have read it seems like more economists are against the minimum wage then are for it (85-15 split against it is my intuitive feel)).�

The arguments for would have to be centered squarely on more transfer payments into the economy by taking care of a lower socioeconomic group funded by citizens in the form of higher product prices and by companies via perhaps lower profits.

The arguments against include creating higher unemployment for those same types of unskilled workers subject to the minimum (due to higher labor costs causing firms to higher less unskilled workers), higher product costs contributing to inflation which lowers real incomes, and firms becoming less able to compete globally due to higher wage costs. In addition, there has been several analyses indicating that a significant percentage of people receiving the minimum wage today are actually NOT the poor, but rather the "second income earner" in the family, our youth, and retirees augmenting their pensions/social security. The minimum wage also reduces at least some of the incentive for workers receiving the minimum wage to improve their skills if the minimum wage continues to increase at or near the cost of living..

Cherly Laslo Writes:

79% of economists agree that a minimum wage increases unemployment among young and unskilled workers.

(Source: Alston, Kearl, and Vaughn survey published in American Economic Review, May 1992)

Like any science, economics should never come down to a vote. "Can the position be supported with rational reasoning?" is the question we should ask.

The reasoning behind the 79% is: Wages are a measure of the productivity of labor. When a man's productivity is earning the company $5/ hr and the minimum wage is increased to $7/hr, this man will be unemployed. It is now illegal for him to hold a job at his current productivity, so he can't get his foot on the first rung of the employment ladder. Former prisoners, non-English speakers, and youth raised in homes that didn't teach good social skills are harmed the most by minimum wage laws. How much would the crime rate be reduced if we made work at any wage legal?

Minimum wage laws enacted by the federal government do not account for standard of living in a particular area. After the Civil War, the northern states lobbied for federal minimum wage laws because the price floor was non-binding in the north but binding in the south. The north benefited as southerners unable to find jobs moved north and provided cheap labor.

Apprenticeships used to be common in the US. Getting paid a little to learn a trade provided incentive to teenagers. Today this pay is illegal, so students in vocational schools are not paid at all. Who benefits? Union labor. 

Mike Fladlien writes:

Minimum wage laws make wages sticky.  When market conditions change some can change their wages and some cannot.  Some structural unemployment has to result.  I think more workers are earning $8 or less is the result that economic theory predicts.  As more subs for labor are found, costs are being driven down to their long run average total cost.  The economy is working to efficiency.

An increase in the minimum wage would be an increase in a nominal wage.  During a tight labor market when the unemployment is less than the natural, it is very likely that the REAL wage will decrease.  One might find employers hiring more employees as the real wage declines.

It has also been my understanding that employers respond to an increase in the minimum wage by reducing the HOURS that their employees work and making the labor work harder.  Thus, the unemployment rate might not change.  I believe, however, that one would see in the data for the employment/population ratio for the population group in the 18-24 age group experience an increase in unemployment.

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