The U.S should abolish the Minimum Wage

Minimum Wages and Employment: Theory Neoclassical Model [1]: The neoclassical model, which is the model taught in most textbooks, is very straightforward. The model assumes labor and product markets are competitive, there is only one type of labor, output is produced with labor and capital, and workers are covered by the minimum wage. According to the model, setting the minimum wage above the equilibrium wage raises a firm’s marginal cost of production, and leads to two effects. First, the price of output rises and thus demand falls, leading to a decline in production (scale effect). Second, higher wages cause firms to substitute capital for labor (substitution effect). As a result, employment declines. Thus, setting a minimum wage prices out workers who do not produce a certain amount per hour. A worker worth $5 an hour will have a hard time finding work at $7, for example. The Keynesian Model [2]: Despite Keynesianism’s association with the left, most Keynesian economists believe minimum wages produce unemployment. Keynesian models say prices are sticky, and sticky prices for labor cause unemployment. During a recession, prices do not fall, and it is difficult for the market to adjust. In a classical perspective, prices adjust rapidly, turning downward and, over time, going back up with full employment quickly restored. But, as prices are sticky, this adjustment does not occur rapidly in a Keynesian model; this is why fiscal and monetary stimulus are so important during downturns. A minimum wage worsens this: prices for labor cannot fall below a certain point, making a recovery much more difficult. This leads to more unemployment. Monopsony Model [3]: The monopsony model is the only model that claims minimum wages do not reduce unemployment. In this model, a business is the single employer and thus faces a downward sloping supply curve. For this reason, a monopsonist must provide higher wages than would occur in a competitive marketplace. Minimum wage hikes, therefore, have no effect on employment—and, in some cases, increase employment. This model, however, is generally “not viewed by most economists as a sensible model of low-wage labor markets, which in most industries and geographic areas consist of numerous small firms.”[3] There are exceptions, of course, but this theory is not accepted. Therefore, on a theoretical level, we can infer that minimum wages lead to higher levels of unemployment than there otherwise would be. Empirical Evidence The Historical Consensus: Studies dating before the 1980s almost unanimously concluded that minimum wages reduced employment. While a few economists had dissenting theories, the evidence was fairly lopsided. The old research culminated in the Brown, Cohen, and Gilroy review of 1982. The scholars surveyed hundreds of studies on the topic, and concluded that a 10% increase in the minimum wage would lead to a 1-3% decrease in employment for low-skilled workers [4]. The study was seen as to rigorous, so expansive, that little research was published on minimum wages for the next decade. New Minimum Wage Research: The first wave of new minimum wage research arrived in 1992, ten years after the Brown et al. review, in a symposium of the Industrial Labor and Labor Relations Review, a prestigious economic journal. This is where the famous (or infamous) Card, Krueger, and Katz studies were published. These studies challenged the Brown consensus, and argued minimum wage hikes had little effect on employment. A flurry of new research came forth, either backing or opposing the Card et al. research. By the end of the decade, most researchers had again come back to the Brown consensus, and believed minimum wages reduced employment. This section of research culminated in the review by David Neumark, of UC Irvine, and William Wascher, a Federal Reserve economist. They reviewed hundreds of studies from the 1990s to 2006, and confirmed the Brown report: a ten percent increase in the minimum wage leads to a 1-3% decrease in employment [5]. Voting with their feet The way people “vote with their feet”—that is, how people migrate from one area to another—is one of the most accurate ways of gauging how certain policies affect certain groups. The hordes of East Germans who attempted to enter West Germany in the aftermath of World War II suggest the living and political conditions were better in the free West than in the repressed East. The hundreds of Chinese citizens who fled to Hong Kong, one of the freest economies in the world, during the Cold War also suggests the conditions in Hong Kong were superior to those in Communist China. The fact no Western nation had to set up walls to keep people in suggests a lot. In the same way, we can determine the effect minimum wage laws have on low-skilled workers by seeing if low-wage workers flee higher minimum wages. Research by economist Joan Monras, who works with the Paris Institute of Political Studies, answers the question. She believes, theoretically, if minimum wages harmed low-skilled workers, these type of workers would flee to jurisdictions where minimum wages were lower or nonexistent. She empirically tests her theory. To do this, she looked at state minimum wages between 1985 to 2012. Her models showed a few predictable results: 1) Those who kept their jobs earned more. 2) Workers with few skills had an easy time finding full-time employment before minimum wage increases. After minimum wage hikes, the job search became much more difficult. 3) High wage workers, who would not be affected by minimum wages, were used as a control group—evidence also bore out the conclusion that they were not affected. Monras also found that minimum wages, while they increased wages, reduced employment—and employment fell more than wages rose. A one percent increase in wages due to minimum wage hikes led to a 1.2% reduction in full-time employment. Based on this evidence, the model predicted that low-wage workers would flee areas with high minimum wages—and they did. Monras found that, “A 1 percent reduction in the share of employed low-skilled workers [following minimum wage increases] reduces the share of low-skilled population by between .5 and .8 percent. … workers for whom the [minimum wage] policy was designed leave the states where the policy is implemented.”[6] Harms of unemployment As I have written in other publications, minimum wages price “young workers out of the market and prevents them from getting valuable work experience.” Lowering, or fully abolishing the minimum wage, would allow unskilled workers to “enter the workforce and learn important skills.” For teenagers, who are the most affected by minimum wage laws, abolishing the minimum would “increase their future wages and reduce their idleness.”[7] As I’ve written elsewhere, “If the job market were to be represented by a ladder where more experienced and skilled workers climb to the top, a minimum-wage hike would saw off the bottom rungs – unskilled workers wouldn’t even have a chance to jump on!”[8] Minimum wages, by pricing workers out of the market, make workers worse off because the longer people are idle, the fewer skills they have. Minimum wages undoubtedly harm workers in the long-term. Not only that, but unemployment in general, outside of skill acquisition, causes larges amount of financial and emotional distress. Long-term unemployment leads to not only less income, but also worse health. Children in homes with unemployed parents have lower academic achievement.[9] A Gallup survey found that, “unemployed Americans are more than twice as likely as those with full-time jobs to say they currently have or are being treated for depression—12.4 percent vs. 5.6 percent, respectively.”[10] We must remember those who are unemployed due to minimum wage laws are not just statistics. They are living people with dreams, needs, and feelings—just like us. The unemployment caused by minimum wages reduces their future income, is deleterious to their mental health, and is deleterious to their children, who are innocent bystanders in all of this. With this in mind, I call for an end to the immoral, destructive, and disgusting minimum wage law. 1. Neumark, David and William L. Wascher, Minimum Wages, 39. 2. http://www.forbes.com... 3. Neumark and Wascher, Minimum Wages, 54. 4. http://www.nber.org... 5. Minimum Wages is one version of their survey. 6. http://ftp.iza.org... 7. http://www.abqjournal.com... 8. http://www.abqjournal.com... 9. http://www.urban.org... 10. http://www.gallup.com...