Resolved: The Minimum Wage Should be Increased

I thank Wylted for taking the challenge! I will rebut my opponent’s arguments next round. As his arguments focused primarily on the poverty aspect of the debate (which I will respond to next round), my case will be primarily oriented towards the effect minimum wages have on employment. ==In Theory== Before discussing the empirical literature (which is what I always do, come on, it’s me ;D) I will discuss what happens *in theory* when minimum wages are increased. I will present both the neoclassical and monopsony models, in order to clarify to the voters as to *why* the changes in employment occur the way they do. The empirical section will prove which theory is better supported in the actual world. First, the neoclassical model. The neoclassical model is the model which is presented in most economic textbooks and is widely accepted by mainstream economists. The model in its most basic form assumes that labor and product markets are competitive. Setting the minimum wage above the equilibrium raises the firms cost of production, which leads to two economic effects. First, the price of output increases, so the demand for it falls (output is defined as the quantity of goods or services produced over a given time period). Second, the higher wages lead the firms to substitute capital for labor. This leads to a decrease in the demand for labor. In the empirical literature, this is measured through labor elasticity: this is basically a measure as to how much unemployment is created due to the increase of the minimum wage [1]. The model also assumes that all workers are being paid in excess of the previous minimum wage. Though, in the US, this is not far from the truth (as 90% of workers are paid above the minimum wage), it is still a simplification made by the model. The second theory is the monopsony model. The neoclassical model assumes a competitive market, so one company cannot set the equilibrium wage: it is created through competition, and the minimum wage, as a mandated price floor, disrupts the process and leads to a net-loss of jobs. The monopsony model takes the opposite extreme. The model assumes that individual firms do have control over the wage equilibrium, and assumes much less competition than the previous model. In the standard form, the ‘monopsonist’ is what represents the employer’s side. It is generally one firm. The collection of workers represent the homogenous workers, who are all paid the same wage. Due to the fact the monopsonist is the only employer, and is facing an ever increasing supply curve and increases wages in order to entice workers. If the minimum wage is not set too high, there can actually be an increased level of employment, as the firm (who is raising wages) sees more of a supply in labor, and therefore has lower employment costs [2]. Although this is a possibility, it is generally not accepted as it would not apply well towards a national minimum wage policy. The equilibrium wage varies across industries, skill sets, and regions—the labor market simply is not homogeneous in the real world, and it is very seldom that a monopsonist actually exists. To settle the question as to which theory is correct, we must turn to the empirical literature. Both theories work on paper, but it is the result in the real world which accurately tells us which theory is valid. ==Empirical evidence on employment effects== The empirical evidence in the minimum wage debate is very one-sided. In almost every review (except a few critical studies, e.g, Myth and Measurement [3]), the literature has concluded that the burgeoning literature supports the theory that higher minimum wages reduce employment levels. The first systemic review of the literature was published in 1981. This study created the ‘consensus’ estimate regarding the elasticity of minimum wages. They found a 10% increase in the minimum wage led to elasticity measurements of -0.1 to -0.3. In other words, a 10% increase in the minimum wage led to a 1-3% decrease in employment for low skilled workers [4]. A second review by the Joint Economic Committee came to similar conclusions. They found that, not only do minimum wage laws reduce employment, but they reduce on the job training which lead to lower incomes in the long term (although they do get a temporary increased wage). They find that the vast preponderance of evidence demonstrates the negative effects of the minimum wage [5]. The following graph, which was produced by the same report, shows a close correlation between real minimum wage levels and teenage unemployment [6]: A newer review published in 2006 corroborated these earlier summaries, concluding “a sizable majority of the studies... give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages” [7]. The review was also slightly updated in 2008, with the same results. The study found that about two thirds of the published research supported the neoclassical model of the minimum wage, and supported the ‘consensus view’ created in 1981. When the research was limited to studies with strong methodology, 80% point to negative employment effects [8]. Most of these studies are known as difference-in-differences studies. The methodology, in the simplest terms I can think of, are comparing rates of unemployment before and after the minimum wage laws were changed. In many cases, this can be seen to underestimate the result. Research published last year noted that studies claiming ‘no effect’ rely upon this methodology. Although the vast amount of research still finds a negative effect when using this methodology, difference-in-differences often produces a misleading ‘no effect’ conclusion. In many cases, changes in the minimum wage should not be expected to change unemployment levels immediately. In fact, there is often a ‘lag’ after the law before minimum wages take effect [9]. There is also research indicating many firms refuse to lay off employees due to moral considerations. But they are not opposed to not hiring people if the cost of hiring becomes too high (as new workers would give the costs of a higher wages to the firm). Therefore, research looking into employment dynamics—that is, the rate of new hiring—shows that employers are less likely to hire workers after new minimum wage laws are passed [10]. Other studies claiming ‘no effect’ fail to recognize that the effect of transitioning to a new equilibrium are often slow or not smooth [11], meaning the noise in the data has to be accounted for before we can assume there is ‘no effect’. As noted, employment dynamics do a good job minimizing this problem, and the evidence there suggests decreased employment. I caution everyone who looks into the effects of minimum wage on the economy to be wary of case-studies. Case studies are not representative of the entire US. However, they can give some basic information as to how minimum wages interact with the workforce—at least in the specific area of study. An increase of the local minimum wage in New York by only ~1 dollar led to a 20% reduction of youth employment. The evidence is robust when changing the control variable to different surrounding geographical areas. This gives some credence to the idea that minimum wages may have effects larger than the consensus view [12]. ==Minimum wages may cause long-term harm== This argument is one of the most compelling against increasing the minimum wage. Increased minimum wages are shown to increase the amount of children who drop out of school in order to get a job. They assume that the higher wages will give them a stable income, and they would not need to continue schooling. However, as noted, employment rates drop and most negatively affect low-skilled youths. Therefore, this increases the chances of them becoming idle. They neither get 1) skills from schooling, or 2) skills from work experience. Over the long-term, their future prospects for attaining a job significantly diminish and their future wages are lower than what they would have been had minimum wages not been increased [13]. Minimum wages are not only associated with decreased school enrolment, but also decreasing the amount of training people in low-paying jobs receive. Research published starting in the 1980s suggested that minimum wages would decrease the amount of training workers would receive. More modern evidence confirms these conclusions and attempts to correct many of the shortcomings of the previous papers. Both formal, informal, and total training decreased significantly and had large negative elasticities. Although evidence for training to obtain a job was more ambiguous, there was overall a statistically insignificant decrease for that specific portion of training [14]. Evidence suggests decreased school enrolment and on the job training as a result from minimum wage laws. This indicates that, over the long term, potential earnings may actually decrease due to increases in the minimum wage, meaning the minimum wage has a long-term negative impact on lesser-skilled workers. Conclusion: The evidence as to the negative employment effects due to increased minimum wages is significant and vast. Minimum wages will harm educational attainment and reduce on the job training, leading to a long-term adverse effects from minimum wage laws. References: 1. Neumark, David and William L. Wascher, Minimum Wages (Cambridge: MIT Press, 2008), 39-52. 2. Ibid, 53 – 54. 3. Card, David and Alan B. Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton: Princeton University Press, 1995). 4. http://tinyurl.com...; 5. http://tinyurl.com... 6. http://tinyurl.com...; 7. http://tinyurl.com...; 8. Neumark and Wascher op cit 39. 9. Ibid, 63. 10. http://tinyurl.com...; 11. http://economics.mit.edu... 12. http://tinyurl.com...; 13. Neumark and Wascher op cit 214. 14. Ibid, 201.