#minimum-wage

A 2019 study in the Quarterly Journal of Economics found that minimum wage increases did not affect the overall number of low-wage jobs in the five years following the wage increase. However, it did find disemployment in 'tradable' sectors, defined as those sectors most reliant on entry-level or low-skilled labor.[78]

A 2018 study published by the University of California agrees with the study in the Quarterly Journal of Economics; it finds that minimum wages actually lead to fewer jobs for low-skilled workers. The article discusses a trade-off for low- to high-skilled workers: when the minimum wage is increased, GDP is more heavily redistributed toward high-academia jobs.[79]

In another study, which shared authors with the above, published in the American Economic Review, found that a large and persistent increase in the minimum wage in Hungary produced some disemployment, with the large majority of additional cost being passed on to consumers. The authors also found that firms began substituting capital for labor over time.[80]

Card and Krueger expanded on this initial article in their 1995 book Myth and Measurement: The New Economics of the Minimum Wage.[82] They argued that the negative employment effects of minimum wage laws are minimal if not non-existent. For example, they look at the 1992 increase in New Jersey's minimum wage, the 1988 rise in California's minimum wage, and the 1990–91 increases in the federal minimum wage. In addition to their own findings, they reanalyzed earlier studies using updated data, generally finding that the earlier negative employment effects did not hold up in the larger datasets.[83] This had major implications on policy, challenging long-held economic views that increasing minimum wage led to deadweight loss.

A 2011 paper reconciled differences between datasets, showing positive employment effects for small restaurants but negative effects for large fast-food chains.[87] A 2014 analysis found that minimum wage reduces employment among teenagers.[88]

A 2017 study in Seattle found that raising the minimum wage to $13 per hour reduced the incomes of low-wage workers because they worked fewer hours as businesses adjusted to higher labor costs.[94] A 2019 study in Arizona suggested that smaller minimum wage increases might lead to slight economic growth without significantly distorting labor markets.[95]

For free-market types, including The Economist, fiddling with wages by fiat sets off alarm bells. In a competitive market anything that artificially raises the price of labour will curb demand for it, and the first to lose their jobs will be the least skilled—the people intervention is supposed to help. That is why Milton Friedman called minimum wages a form of discrimination against the low-skilled; and it is why he saw topping up the incomes of the working poor with public subsidies as a far more sensible means of alleviating poverty.

Scepticism about the merits of minimum wages remains this newspaper’s starting-point. But as income inequality widens and workers’ share of national income shrinks, the case for action to help the low-paid grows. Addressing the problem through subsidies for the working poor is harder in an era of austerity, when there are many other pressing claims on national coffers. Other policy options, such as confiscatory taxes, are unattractive.

Nor is a moderate minimum wage as undesirable as neoclassical purists suggest. Unlike those in textbooks, real labour markets are not perfectly competitive. Since workers who want to change jobs face costs and risks, employers may be able to set pay below its market-clearing rate. A minimum wage, providing it is not set too high, could thus boost pay with no ill effects on jobs.

Empirical evidence supports that argument. In flexible economies a low minimum wage seems to have little, if any, depressing effect on employment. America’s federal minimum wage, at 38% of median income, is one of the rich world’s lowest. Some studies find no harm to employment from federal or state minimum wages, others see a small one, but none finds any serious damage. Britain’s minimum wage, at around 47% of median income, with a lower rate for young people, also does not seem to have pushed many people out of work.

High minimum wages, however, particularly in rigid labour markets, do appear to hit employment. France has the rich world’s highest wage floor, at more than 60% of the median for adults and a far bigger fraction of the typical wage for the young. This helps explain why France also has shockingly high rates of youth unemployment: 26% for 15- to 24-year-olds.

A second lesson is that politicians should give the power to set minimum wages to technocrats. In Britain, the floor is adjusted annually on the advice of economists and statisticians in the Low Pay Commission; it has generally advanced gradually. In America, the federal floor is set by politicians and adjusted irregularly in huge increments. That does no favours to American workers or their employers.

Finally, governments should remember that minimum wages are a palliative. They should not distract attention from more fundamental causes of low wages—such as a lack of education and skills—and the efforts to address them.