Finally, even if we accept the monopsony theory, it does not tell us whether or how much to raise the minimum wage. It tells us there is an optimal minimum wage, but the current minimum wage is not zero. This theory gives little guidance on these questions. In fact, as Richard Freeman, the highly regarded labor economist, suggests after reviewing a number of studies on both sides of the aisle, a rise in the minimum wage may lower employment but that effect is modest and much smaller than previously thought. While a higher minimum wage may entail some modest employment reduction, proponents of a higher minimum wage correctly point out that is not enough to reject it.
Benefits also have to be examined.
Let's take a closer look at this way of viewing minimum wage policy. This hypothetical tax-transfer scheme is identical in effect to a minimum wage policy. The tax-transfer scheme which I describe causes distortions. That is, there is an incentive for employers to avoid the tax, and an incentive for individuals to enter the work force to capture the subsidy. These effects are confirmed in recent studies.