Economists have traditionally considered the minimum wage a bad idea. But in recent years, including this one, a number of economists have come out in favor of the minimum wage. Why? What happened that caused some economists to change their minds?
If you’re into cerebral drama, it’s not a bad story.
The key to understanding the economics of the minimum wage is careful thinking about the buyers’ side of the labor market, the employers.
Businesses compete with each other for the labor that workers supply. But a business will not pay a worker more than the productivity the worker contributes. And businesses are creative. Businesses are literally in business because they’re good at figuring out how to produce things people want and how to produce them in the most economical way. Their survival depends on it.
If a type of labor or any other input to production becomes more expensive, businesses aren’t “stuck.” They figure out ways to economize. One way is to use less of the now more expensive input.
That’s the predicament of the minimum wage. Raise the minimum wage and businesses will figure out ways to cut back on low-skilled labor. For some low-skilled workers, that means reduced hours. For others, it means unemployment.
A policy that hurts many of the people it’s supposed to help is not a good policy, which is why economists have traditionally opposed the minimum wage. It was a settled issue.
Or so it seemed.
The reasoning above says that raising the minimum wage will reduce the employment of low-skilled workers. But it doesn’t say by how much. That “how much” has become very important. For many economists, it’s the crux of the minimum wage issue.
Economists call the “how much” the employment effect of the minimum wage. Determining the actual employment effect is an empirical matter. It requires statistical analysis of actual experience.
Economists have been estimating the employment effect now for 50 years and counting. The results? Of 121 estimates in studies published since 1992, 80 percent find a negative employment effect: increasing the minimum wage reduces the employment of low-skilled workers. No surprise.
But many of the negative estimates are small. For example, estimates that a 10 percent increase in the minimum wage reduces the employment of low-skilled workers by between 1.5 and 3.5 percent are common.
Some of the 121 estimates are close to zero. And some are even positive, suggesting that increasing the minimum wage actually increases the employment of low-skilled workers.
It’s those estimates of the employment effect – the small negatives, the close to zeroes, and especially the positives – that have caused some economists to change their minds about the minimum wage.
See why? A negative but small employment effect suggests that raising the minimum wage may substantially benefit low-skilled workers. They receive a higher wage at only a small cost in reduced hours or a slightly longer job search.
An employment effect of zero is even better: a higher wage with no cost in reduced hours or time unemployed. A positive effect is better still: a higher wage and businesses want their services even more. A positive effect may sound like water running uphill, but that’s what some studies have found.
And that’s the point. Some economists have changed their minds and now support the minimum wage because the evidence, as they interpret it, says they should.
That said, there are problems with the evidence and, in my view, a larger problem that goes beyond the evidence. We’ll look at that in my next column.
Reg Murphy Center