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How we know that the minimum wage causes job losses

So, yes, obviously, it’s just great that employers have to pay a decent wage, can’t be allowed to exploit labour, Well, not too much that is.

Except, obviously, raise the price of something and people will buy less of it. At which point we’ve rafts of studies telling us that, well, really, a higher minimum wage doesn’t cause job losses. To which there are a couple of responses.

  1. Tell that to the South Africans. For that’s what we think we will get if that minimum wage is “too high”. Unemployment rates of 27% as vast portions of the population just aren’t worth employing at the pay rate that must be given.
  2. We must abolish tax credits and the EITC.

As John Cochrane points out, that second must actually be true:

This is a bit of economic-ese, so let me translate just a bit. The argument for a minimum wage is that labor demand is inelastic — employers will hire the same number of workers. They will just absorb the higher wages or pass along the costs to customers. Workers get all the benefit. If labor demand is elastic, employers cut back on the number of employees. Most people lose their jobs and only a lucky (or productive, or willing to tolerate harsher working conditions) few get the higher wage.

The argument for wage subsidies requires the opposite assumption. If we subsidize wages, do employers respond by just paying people less? (Or, of we pay the subsidy to the worker, are the same number now willing to work for lower wages from employers? An often forgotten core result of economics is, it doesn’t matter who pays the tax or gets the subsidy.) That is the case if labor demand is inelastic. Or do employers respond by paying the same amount, and expanding the workforce? That is the result if labor demand is elastic. You need elastic labor demand for wage subsidies to work as intended.

Thus, you can’t simultaneously be for higher minimum wages and for wage subsidies. That is cognitive dissonance. Or, inconsistency. Or wishful thinking. And very common.

OK, for the minimum wage and against tax credits works. Against the minimum wage and for tax credits works. Arguing for both is arguing both sides of the coin at the same time – it doesn’t work.

As it happens we’ve already got a generally agreed answer about tax credits. The EITC in the US, some 70% of that goes to the worker, the other 30% does indeed become a subsidy to the employer as they can and do pay lower wages.

Therefore, ineluctably, the minimum wage kills jobs. Logic’s a horrible thing, eh?

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Leo Savantt
Leo Savantt
4 years ago

Welcome back, sorely missed.

Quentin Vole
Quentin Vole
4 years ago
Reply to  Leo Savantt

Agreed Leo, just testing the reply function 🙂

Leo Savantt
Leo Savantt
4 years ago
Reply to  Quentin Vole

It works!

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