July 23, 2009
Economics Department
The Minimum Wage and Unemployment
Columnist Steve Chapman has a piece today complaining that the coming increase in the minimum wage will cause unemployment:
Come Friday, the federally mandated minimum wage will jump to $7.25 an hour from $6.55 -- an 11 percent increase. At a time when employers are laying off workers, Washington is going to make it more expensive to keep them.
If you're a minimum wage employee, your job will pay more, but only if it still exists. These days, most companies are scrutinizing every position on the payroll to make sure it's worth the cost. Raise the toll, and some employees will find they are no longer valuable enough to make the cut.
Increase the price of something, and people will buy less of it. This is solid economic thinking, based on well-established theories of demand. In this case, however, it may be wrong.
The problem is, when economists go looking for statistical evidence that this actually happens in the real U.S. economy, they have trouble finding it. One study even found that raising the minimum wage raises employment.
One possible explanation is simply that it's hard to put together a good empirical study of this effect. Low-wage employment is buffetted by so many factors that it's difficult to pick out the results of just the change in minimum wage. There could be a real increase in unemployment that is simply being missed in the noise. That doesn't mean it's doing no harm. We're just not seeing it.
Another possibility is related to the problem that the minimum wage...isn't. At least not for everybody. A variety of employees are excluded, including some workers at seasonal amusement or recreational facilities, workers at small newspapers or on small farms, workers involved in fishing or newspaper delivery, babysitters, people working as companions to the elderly or infirm, and anybody who receives part of their income as tips. An increase in the minimum wage could cause people to shift into these kinds of jobs instead of going unemployed, and there is evidence that it does.
(Oddly, Chapman actually complains about this---that increasing the minimum wage drives people into below-minimum-wage jobs---without acknowledging that this mitigates the job-destroying effects of increasing the minimum wage.)
Another possibility is that employers and employees could cheat by not recording all hours worked. This makes it look like the employee is receiving the minimum wage when the effective rate is actually lower. This is illegal, but an employee whose other choice is unemployment isn't likely to complain.
Yet another explanations is that employers may compensate workers in ways that don't show up in the accounting, such as providing supplies like work gloves and soap, allowing a more flexible work schedule, maintaining a break room, or tolerating on-the-job drinking. When the minimum wage is raised, employers could take back some of it by reducing these other forms of compensation.
Other possible explanations are more esoteric. For example, it's possible that labor market imperfections play a role. People who work for minimum wage are likely to be limited in their ability to find jobs. In particular, the cost of commuting or moving may be so high as a proportion of their income that they can only take jobs in a small geographical area around where they live.
This could so limit their job market that they essentially create a labor monopsony around themselves---effectively allowing all their potential employers to conspire to pay them less than the free market rate. Increasing the minimum wage might require these employers to pay them more, but because they are below the market equilibrium price, the increase in wage rate won't reduce the quantity demanded, and unemployment will not be affected.
On the other hand ("on the other hand" is a required phrase for all economics writers), note that if these explanations are true (with the exception of the last one) the reason an increase in the minimum wage doesn't cause unemployment to rise is that it doesn't actually increase worker income. That is, it does no harm because it does no good.
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