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Saturday, February 16, 2013

Is It Logically Possible for a Higher Minimum Wage to Increase Employment?

Of course it is.

A simple exercise by which you can easily convince yourself of this:
Draw a supply and demand diagram. Imagine the current price is below the equilibrium price. Now imagine a price floor is set anywhere between the current price and the equilibrium price. What happens to the quantity exchanged of that good at the new price?
Of course the above is not an argument for a minimum wage or an increase in a minimum wage. First of all, it completely ignores any moral case for or against a minimum wage. Secondly, before we could use the above to justify a hike in that wage, we would have to show that it is likely the current wage is below the equilibrium wage. Then we might ask, "Why is it so?" We might find it is better to handle that reason directly.

Personally, I think the minimum wage is a rather clumsy way to try to help low-wage workers even if the above conditions were true in the case in question. I prefer addressing more fundamental, structural issues if possible. Nevertheless, it is simply false that raising the minimum wage must cause employment to remain unchanged or drop: under the right conditions, it could increase employment.

6 comments:

  1. Right, but there is no way to know what the equilibrium price is other than to look at what prices the market has set. Therefor, such a thing that you argue here is only good as a mental exercise.

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    1. Yep, but you needn't be shocked by the scant empirical evidence for a negative effect on employment. It's not a logical impossibility at least...

      To be sure, there are other logically consistent explanations for the stubborn refusal of empirical studies to show that a minimum wage increase lowers employment. For example, taking account of market power among employers. (See here.)

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    2. I think that it would be quite impossible to do a complete empirical study on this matter because there is no way to control for, or even be aware of, every factor that influences the employment of not only one individual, but thousands of individuals. All that I can say is that due to scarcity, how prices are arrived at, and that there are only a finite amount of resources at any given time, raising a price of anything above its equilibrium price will induce a cost somewhere. That is an inescapable fact, regardless of how it manifests itself.

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    3. Translation: "We don't need no stinking facts!"

      Just kidding :)
      I naturally agree that there are many hurdles to overcome in establishing empirical evidence for the impact of a minimum wage change. However, the fact that multiple studies conducted by careful researchers since Card and Krueger appear to centre around the "negligible" mark should at least give us pause for thought.

      I would also say that understanding how something manifests itself is ultimately the most important thing for any question on economic policy.

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  2. Well, sure. Likewise, it's logically possible that you could mandate lower milk prices without this resulting in either reduced quality or availability of milk. But I think it would be right to treat such a proposal with skepticism.

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  3. I think a guaranteed minimum income program would be better suited towards the poor as long as there are no strings attached. Then if they want to earn more money, they would be able to keep the money that they already get from this program and go from there, but a well executed minimum wage might be able to aid with this too in some circumstances.

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