The Actual Evidence About The Minimum Wage – Yes, It Kills Jobs

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Much is made among progressives about how new research shows that the minimum wage doesn’t in fact kill jobs. This is, at very bestest, a misunderstanding of what the new research actually shows. More likely it’s a determined insistence upon ignoring reality in pursuit of a political following. For we most certainly couldn’t say that progressives are ignorant tout court, could we? After all, they’re all the bright people able to tell the rest of us how to live our lives.

What actual economics tells us about the minimum wage is that yes, people will indeed buy, hire, employ, less of something that is more expensive. Thus higher minimum wages lead to less labour being employed. The thing is though at low wages this effect will be hardly noticeable. The economy is a large and complex thing, very few people do get very low wages, the disemployment effects will get lost in the wash of that national chaos which is the interaction of tens of millions of people.

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When minimum wages are significant in their amount then the effects we expect will be apparent. We’re not, that is, seeing some flip whereby low minimum has no employment effects, a higher has some. We are moving over the limit of detectibility as we raise it.

A useful rule of thumb – and it is no more than that, just a guide – is that when the minimum wage is less than 40% or so of median hourly wage – and we should use the median for part and full time, temporary, workers not just full time full year ones – then we’ll be able to discern pretty much no effect. Simply because very few people in an economy get paid those sorts of wages. Thus any minimum affects very few people. When we move over 50% of that same median then we can discern those effects. Again, it’s not that the effects suddenly turn on, it’s just that they’re now large enough that we can spot them.

That is, roughly enough, what the modern research does tell us. OK.

So, as to backing up the basic idea, minimum wages cause disemployment effects, this from Denmark:

We estimate the impact of youth minimum wages on youth employment by exploiting a large discontinuity in Danish minimum wage rules at age 18, using monthly payroll records for the Danish population. The hourly wage jumps up by 40 percent at the discontinuity. Employment falls by 33 percent and total input of hours decreases by 45 percent, leaving the aggregate wage payment almost unchanged. We show theoretically how the discontinuity may be exploited to evaluate policy changes. The relevant elasticity for evaluating the effect on youth employment of changes in their minimum wage is in the range 0.6-1.1.

Oh. Those effects are there. In exactly the form proposed and predicted by orthodox neoliberal – and no doubt plutocratic dog running capitalistic – theory. Thus the progressives should go back to the drawing board. Except, of course, that’s not what will happen. For that’s not what does happen, does it? In the progressive universe when theory meets reality it is always theory that wins. More, harder, until we’ve elected that new people who act out as we desire them to.

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literate3
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literate3

ER – if minimum wage rises by 40% and hours fall by 45% then wages actually fall by 23% which is not the same as “virtually unchanged”.

Jonathan Harston
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Jonathan Harston

I can see there will start to be arguments to force employers to consume more of the now-more-expensive inputs. Isn’t that the fundamental argument against zero hours contracts? We’ve forced you to pay 10z per unit instead of 5z per unit, how DARE you now choose to only use 20 units instead of the previous 40 units!”