Thursday, March 14, 2013

What economists think of the minimum wage

Last month President Barack Obama rekindled political discussions about the impact of increasing the minimum wage. Unfortunately, those discussions draw very little wisdom from academic economists and are instead based on the whims and guesses of the public.

Here's a short history of the economist perspective on the minimum wage. There was a scientific consensus that the minimum wage harms low-skill workers by pricing them out of the labor market. These upstart workers lack soft skills and have trouble competing with experienced workers so their labor is not worth very much to employers. When the government tells employers they have to pay them more than what their labor is worth, some employers will opt to not hire them instead of raising their wages. That hurts the very people the law is supposed to help and most economists opposed it.

That consensus is now gone because of a 1992 study by David Card and Alan B. Krueger in New Jersey that compared fast food employment with and without a minimum wage. The study showed that the workers were able to receive higher wages without losses in employment. The Card and Krueger study has plenty of critics, but it clearly broke the consensus.

Economists are now divided on the issue, with about a third in support of the laws, a little more than a third in opposition and the rest unsure.

The way the issue is framed in the public realm is very different as well. The popular opposition claims that the problem with the minimum wage is that small businesses will be harmed. I'm tempted to dismiss this as a tactical approach, but claiming it harms the poor would seem to be an equally effective tactical approach and comes packaged with academic support. I think the real issue here is columnists and politicians who don't study economics are just spouting whatever pops into their head and sounds reasonable.

I never want to do that. Even though I fully oppose the existence of a minimum wage, for reasons described by Bryan Caplan and Don Boudreaux, honesty requires that I admit my perspective does not have a consensus and the issue is up for debate.

One footnote to that thought: The pro-minimum wage arguments assume the wage is set at a modest rate. If it went up to something absurdly high like $20 an hour then you would have a strong consensus about its harm to employment levels.

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