Thursday, 6 February 2014

The effect of minimum wages on employment

Recently Eric Crampton at Offsetting Behaviour wrote,
I suppose it's also relevant that Obama wants a substantial hike to the US minimum wage. A dark side of me wants him to do it, just so we can get some clean estimates of just how bad the disemployment effects would be.
Some people would claim that the disemployment effects would be zero or even that the effects on employment would be positive. But economists, by and large, go for there being a disemployment effect of minimum wage increases. Wilson (2012) summaries economists thinking on this as,
The main finding of economic theory and empirical research over the past 70 years is that minimum wage increases tend to reduce employment. The higher the minimum wage relative to competitive-market wage levels, the greater the employment loss that occurs. While minimum wages ostensibly aim to improve the economic well-being of the working poor, the disemployment effects of a minimum wages have been found to fall disproportionately on the least skilled and on the most disadvantaged individuals, including the disabled, youth, lower-skilled workers, immigrants, and ethnic minorities.
In 2006 David Neumark and William Wascher published a comprehensive review of more than 100 minimum wage studies published since the 1990s. They found a wider range of estimates of the effects of the minimum wage on employment than the 1982 review by Brown, Gilroy, and Kohen. The 2006 review found that “although the wide range of estimates is striking, the oft-stated assertion that the new minimum wage research fails to support the traditional view that the minimum wage reduces the employment oflow-wage workers is clearly incorrect. Indeed . . . the preponderance of the evidence points to disemployment effects.”

Nearly two-thirds of the studies reviewed by Neumark and Wascher found a relatively consistent indication of negative employment effects of minimum wages, while only eight gave a relatively consistent indication of positive employment effects. Moreover, 85 percent of the most credible studies point to negative employment effects, and the studies that focused on the least-skilled groups most likely to be adversely affected by minimum wages, the evidence for disemployment effects were especially strong. In contrast, there are very few, if any, studies that provide convincing evidence of positive employment effects of minimum wages. These few studies often use a monopsony model to explain these positive effects. But as noted, most economists think such positive effects are special cases and not generally applicable because few low-wage employers are big enough to face an upward-sloping labor supply curve as the monopsony model assumes.

  • Wilson, Mark (2012). "The Negative Effects of Minimum Wage Laws" Policy Analysis, June 21, No. 701, Cato Institute.

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