Minimum Wages and Unemployment: Case Closed

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The only relevant issue in the debate about a government mandated minimum wage is: Does it reduce employment opportunities? The debate is not whether some workers will be better off after legal minimums are increased; some workers will. The debate is not whether “consumption” may increase when some workers are paid higher wages; it may, although unemployed workers will consume less. And the debate is not whether “rich” employers can afford to pay higher wages; some surely can, but whether they should be forced to do so by law is another matter entirely.

Defenders of the minimum wage law make two broad claims. The first is that raising the minimum wage does not increase unemployment among the young and poorly skilled, the only relevant labor pool; and two, that there are empirical studies that support the conclusion that higher minimums don’t hurt employment.

Common sense, logic, and the law of demand easily refute the first contention. Raising the price of anything, while holding other variables constant, always reduces consumption somewhat. With income fixed and substitutes available, private employers use marginally fewer workers when their wages are increased by law. Simply exaggerating the wage increase will make the point obvious: If we double the minimum wage and leave productivity unchanged, is there anyone on the planet who believes that employment would not dramatically decline? Well by the same logic, a marginal increase in the minimum wage, say from $8 to $10 as California has just legislated, will have a marginally negative effect on young and low-skilled employment. Case closed.

But not so fast say the defenders of minimum wages. What about the studies (done by reputable economists presumably) that fail to discover job losses when legal minimums are increased? Well the problem here, of course, is that “testing” a proposition in economics is not like testing some theory in physics or chemistry.

In chemistry, for example, it is possible to accurately measure an increase in the molecular weight (mass) of a compound after mixing precise amounts of chemicals together. It is also possible to repeat the very same experiment and get the very same results in any lab anywhere in the world. Economic phenomena, however, are of an entirely different nature. The data in economics is all historical and the economic consequences observed are likely the result of numerous influences, some known some unknown, most of which cannot be accurately quantified at all. Thus, given the inherent nature of economic data, the best that we can say about an economic study that claims to “test” some economic principle is that the findings may be “illustrative” of certain expected outcomes….but that is all.

Now having said that, are we going to concede that the weight of the “evidence” concerning minimum wage laws is that there is little or no unemployment effect? Hardly. The fact remains that there arehundreds of studies (also done by reputable economists, presumably) that conclude that there ismeasurable job loss when minimum wages are increased.

When the very first federal minimum wage (25 cents) went into effect in 1938, the U.S. Department of Labor itself determined that between 30,000 and 50,000 low-skilled jobs were likely lost due to the law. A comprehensive review of several dozen minimum wage studies by the Federal Minimum Wage Commission in 1981 found that most showed employment declining. On average, for every 10% increase in the minimum wage, employment declined 1-3%. And as recently as 2006 economists David Neumark and William Wascher reviewed more than 100 minimum wage studies in the economic academic literature and concluded that 85% of the strongest studies found that low-skilled employment opportunities declined when the minimum wage was raised.

There are still other sources of data that support the notion that minimum wages are a job killer. In 1948 teenage unemployment rates were about 10% while workers over age 25 had a 3.4% unemployment rate, a 6.6% differential. Yet today the teen unemployment rate is more than 25% (over 40% for black teens) and gap is an astounding 18% higher than the general workforce unemployment rate (7.2%) for workers that are older with more work experience. There is almost unanimous agreement among economists that this huge differential is largely attributable to minimum wage legislation.

Finally, states that set a far lower minimum wage for teen workers generally have lower unemployment rates for teens. Florida and Texas set far lower teen minimums and have lower teen unemployment rates than, say, California and Oregon which make no exemption for younger workers.

In short, the preponderance of the evidence over the last 75 years is that low-skilled jobs (mostly held by the less-educated and less-skilled young and minorities) are extinguished by government wage fixing. Absent the repeal of minimum wage laws–which is totally justified by theory and the bulk of the economic evidence–the best that we can do is urge the Congress and the states to allow employers and young workers to freely negotiate wage rates or, alternatively, to set far lower legal minimums for younger and part-time workers.

Everyone at some point needs an entry-level job and a chance to climb an employment ladder to higher pay. There is no moral or economic reason why government should discriminate against such jobs or eliminate the first few steps of that ladder.

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