The minimum wage is a nothingburger unless your wage depends on it.

Opponents of the minimum wage think that it creates all sorts of horrible problems for the economy.  For example, Millionaire Fast-Food CEO, Andrew F. Puzder has been fighting the minimum wage because he claims that it is the reason why the US has had high unemployment.  He even claims that the minimum wage is causing young people to stop looking for work:

Since January of this year, the percentage of 16- to 29-year olds working or actively looking for work has repeatedly hit historic lows.

That quote shows that he doesn’t understand how the minimum wage is thought to create unemployment.  When wages rise, more people have an incentive to actively look for work, but the number of jobs doesn’t rise.  If anything, the number of jobs should fall.  That would be the real tragedy of raising the minimum wage too much.  Unemployment can be created by an increase in people looking for work or a decrease in the total number of jobs.  The latter would be a much bigger tragedy than the former.  Fortunately, most academic studies show approximately zero effect of minimum wage laws on the total number of jobs.  If the minimum wage rose high enough, I’m sure it would reduce jobs, but it is generally pretty close to equilibrium wage, so it is hard to find an effect on the number of jobs. Don’t take my word for it, look at a meta analysis of multiple studies.

meta min wage

Most studies found no significant effect.  That is the big spike.  Many published studies have even found that the minimum wage is associated with increased employment!  Overall, the minimum wage in the US has been so modest that it just hasn’t had a measurable effect on anything in the economy except the incomes of the people working for the minimum wage and the people in charge of them.  Fast food CEOs’ wages are also dependent upon minimum wage legislation, so restaurant CEOs care about the minimum wage.  A lot. Perhaps that is what motivates their opposition.

The relative insignificance of the minimum wage to the overall economy is demonstrated by this data from the Institute for Policy Studies

wall st vs min wage

The minimum wage is simply a nothingburger to the US economy compared to the BONUSES of Wall Street.  That isn’t total Wall Street compensation.  Only executive bonuses.  And most of the money paid to the millions of Americans who work a minimum wage job would have been paid even without the minimum wage because the minimum wage is pretty close to the equilibrium wage anyhow.  The minimum wage only adds a bit to the top of the wages that they would have earned without a minimum wage.  I added a little red rectangle that shows my educated guess at how much money the minimum wage might add to low-wage incomes.  The little red box REALLY shows what a nothingburger the minimum wage is.

Unless your wage depends on it.

Yesterday I wrote about an easy way to fix problems with the minimum wage that would make it work better. Fast food CEOs probably won’t agree.

Update: Menzie Chin pulled a great quote out of the meta analysis cited above:

The [meta analysis] suggests the existence of a very small, but statistically significant, negative minimum-wage effect. A 10 per cent increase in the minimum wage reduces employment by about 0.10 per cent (see column 4 of Table 3). But even if this adverse employment effect were true, it would be of no practical relevance. An elasticity of -0.01 has no meaningful policy implications. If correct, the minimum wage could be doubled and cause only a 1 per cent decrease in teenage employment.

The 1 per cent decrease in employment is pretty much a nothingburger, but a doubling of wages is a big deal for the people affected.  The US has more teenagers working than in any other rich country that I am aware of.  They should be studying harder rather than flipping burgers because focusing more on education would pay off more in the long run.  A slight decrease in teen employment could help increase long-run productivity by keeping more kids in school.  And increasing their wages would help them afford more college.

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Posted in Inequality, Labor

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