Minimum Wage Laws are Bad for the Poor, Right? Wrong Again.

Righties love to claim that minimum-wage laws hurt the poor because they discourage employers from hiring. They claim that the disemployment effect cancels out the higher-wage effect, making the poor worse off.

But over and over again, research shows that it just ain’t so. Here’s more (PDF). A new and stunningly well-executed study comparing adjacent counties with different minimum wages, over decades.

For cross-state contiguous counties, we find strong earnings effects and no employment effects of minimum wage increases.

In econo-speak: the elasticity of labor demand among low-wage employers in the U.S., at least the elasticity response to the minimum wage variations that we’ve seen over past decades, is very, very low — downright unmeasurable, in fact.

The effects of minimum wage differences on earnings are both significant and statistically significant. Their effects on employment are neither.







7 responses to “Minimum Wage Laws are Bad for the Poor, Right? Wrong Again.”

  1. Chris T Avatar
    Chris T

    It also suggests that labor markets may not be as flexible as economists tend to say. Companies don’t make do with less labor than they need even with higher prices, but they also don’t buy up existing labor just because it’s relatively cheap.

  2. Steve Broback Avatar

    Cool. Wow. Turns out price floors are harmless. $50 an hour here we come! Hey, think it works with price ceilings too, find the Berkeley rent control paper… ; )

    Seriously though — even economists are mixed on the minimum wage. No overwhelming consensus that it’s evil. “37.7 percent want it increased, while 46.8 percent want it eliminated.”

  3. Asymptosis Avatar

    >$50 an hour here we come!

    Ah, a straw man and the fallacy of the extremes, all in six words. “You seem to be saying we should eliminate all taxes. But that would be a disaster! So we obviously shouldn’t reduce them.”

    (I know you’re [sort of] joking.)

    >”37.7 percent want it increased, while 46.8 percent want it eliminated.”

    I always want to see the survey among economists who actually study the issue, or who read the research from those who do. Among them, the consensus these days is really strong: at current rates, the employment effect is essentially invisible.

    49% of economists think that taxes being too high is a major (18%) or minor (41%) reason that the economy isn’t doing better than it is. But economists who study the long-term effects of taxation say it ain’t so.

    36% of economists think that Americans work too much. 3% think they work too little. (The majority think it’s about right.)

    86% think that fiscal policy has a significant stimulative impact in a less than fully employed economy.

    83% think redistribution of income is a legitimate role for government.

    Less than 15% of economists believe in free-market, non-interventionist policies. (They agree strongly on tariffs, government ownership of industrial enterprises; otherwise not.)

  4. Asymptosis Avatar

    Oh just to add: that last survey doesn’t ask about rent control, presumably because it’s almost nonexistent in the big picture of the American economy. I’m sure there’d be a consensus among economists on that, which is why the preceding statement is true.

  5. Asymptosis Avatar

    Also to add:

    Non-economists are even more wildly wrong about taxes than economists. *61%* think that high taxes are a major reason that the economy is not doing as well as it could — compared to 18% of economists. 91% think it’s a major or minor reason.

    11% think it’s *the main reason* — compared to 6% of economists.

    14% think the main reason is that “Too many people are on welfare” (second only to the federal deficit) — compared to 1% of economists.

    10% think the main reason is that foreign aid spending is too high — compared to…zero economists.

    Lefties might not know micro, but righties don’t know macro.

  6. Chris T Avatar
    Chris T

    What is the effect on the price level? If companies simply raise prices to counter the effects of minimum wage, you haven’t actually improved anything on net.

  7. Leroy Dumonde Avatar

    The key is to realize that companies large and small all have some degree of monopsony power so there’s always some slack in the system, i.e. companies are exploiting their workers, er oops, are capturing some of their workers’ marginal product. Also many people are in the informal economy because they don’t want to deal with the hassle of having a real job.

    It is an absolute certainty that pushing up the minimum wage will eventually reduce employment and/or set off a wage price spiral of inflation. But I think it is reasonable to keep pushing it up until there are some signs that one or both of these are actually starting to happen. Otherwise, it’s just a giveaway to those who have an unfair advantage.