The minimum wage, again

Trevor Mallard blogs his support for an increase in the minimum wage. He writes

Business NZ would squeal. But most employers know that lifting wage rates encourages investement in capital equipment and training to make their labour force more productive. It is all part of the movement to a high skill, high wage economy.

Yes there is a relationship between productivity and wages but it runs the opposite way to what Trevor claims. Over time if you make people more productive, wages will increase. Even Paul Krugman has noted this fact. He writes,

As it happens, the past 40 years offer considerable evidence on what happens to the wages of a country whose productivity gains on that of higher-wage nations. Four decades ago, productivity in Europe was well below U.S. levels in most industries, and Japan lagged even further; since then, productivity levels in the advanced world have converged, although most measures still suggest that the United States retains some edge. More recently, a group of "newly industrializing economies" in Asia has achieved spectacular productivity increases starting from a very low base. Given these dramatic changes in relative productivity, what has happened to relative wages?

The answer is that wages have risen in each country, more or less in line with productivity. Table 2-3 shows data on long-run increases in productivity and real wages in several representative countries. Bearing in mind that there are some slippages in the data (for example, there are a number of technical problems in the way that both productivity and real wages are calculated), the basic picture is one in which converging productivity has produced a convergence in wages, just as the theoretical analysis would predict.

Notice that we do not have good data on South Korean wages over the full sample. However, the United States government has been collecting hourly compensation (wages plus benefits) data for the industrial sector of several newly industrializing countries since the mid 1970s. According to these data, South Korean compensation rose from only 5 percent of the U.S. level in 1975 to 46 percent in 1996. An index of compensation in several newly industrializing Asian economies rose from 8 percent of the U.S. level in 1975 to 32 percent by 1996. In short, the experience to date is that wages always do move more or less in line with productivity. (Paul Krugman and Maurice Obstfeld, "International Economics: Theory and Policy", Prentice Hall.)

and in a similar vein he says,

Economic history offers no example of a country that experienced long-term productivity growth without a roughly equal rise in real wages. In the 1950s, when European productivity was typically less than half of U.S. productivity, so were European wages; today average compensation measured in dollars is about the same. As Japan climbed the productivity ladder over the past 30 years, its wages also rose, from 10% to 110% of the U.S. level. South Korea's wages have also risen dramatically over time. ("Does Third World growth hurt First World Prosperity?" Harvard Business Review 72 n4, July-August 1994: 113-21.)

Raising wages will just cause employers to use less labour, that is, increase unemployment. Demand curves slope downwards even for labour.

One of best discussions of the effects of the minimum wage is the book "Minimum Wages" by David Neumark and William L. Wascher, Cambridge: MIT Press, 2008. In this book Neumark and Wascher offer a comprehensive overview of the evidence on the economic effects of minimum wages. Synthesizing nearly two decades of their own research and reviewing other research that touches on the same questions, Neumark and Wascher discuss the effects of minimum wages on employment and hours, the acquisition of skills, the wage and income distributions, longer-term labour market outcomes, prices, and the aggregate economy.

Based on their reading of the evidence, Neumark and Wascher argue that minimum wages do not achieve the main goals set forth by their supporters. They reduce employment opportunities for less-skilled workers and tend to reduce their earnings; they are not an effective means of reducing poverty; and they appear to have adverse longer-term effects on wages and earnings, in part by reducing the acquisition of human capital. The authors argue that policymakers should instead look for other tools to raise the wages of low-skill workers and to provide poor families with an acceptable standard of living.

In chapter 9 “Summary and Conclusions” they write

“Three conclusions, in particular, stand out. First, as indicated in chapter 3, the literature that has emerged since the early 1990s on the employment effects of minimum wages points quite clearly – despite a few prominent outliers – to a reduction in employment opportunities for the low-skilled and directly affected workers”. (p. 286)

Also from Table 9.1 page 287 when dealing with the effects on employment, under the ‘Summary of evidence’ heading Neumark and Wascher write

“Minimum wages reduce employment of low-skilled workers; adverse effects even more apparent when research focuses on those directly affected by minimum wages.”

At The Standard we are told Kiwis back fairer minimum wage. We are told

An overwhelming 61% of people in a large (2,300 person) survey conducted by the Herald favour immediately lifting the minimum wage $15 an hour from its current $12.50.

On the other hand economist Greg Mankiw has a list of things that economists agree on in chapter 2 of his first year textbook. Number 12 on this list is “A minimum wage increases unemployment among young and unskilled workers” and 79% of economists agree. So this result is widely accepted by economists.