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Brooks Wilson's Economics Blog: Carden and the Minimum Wage

Thursday, October 22, 2009

Carden and the Minimum Wage

(HT Cafe Hayek) Art Carden (, "Repeal the Minimum Wage,") presents the plurality opinion of economists when he calls for a repeal of the minimum wage; in a survey, 46.8% of economists favored repealing the minimum age, 1.3% favored lowering it, and 14.3% favored letting it die on the vine but not changing it (see my post).  Students seem surprised to learn that most economists don't like the minimum wage, but a little economic analysis demonstrates its shortcomings.  I have inserted references to the graph, "The Minimum Wage and Unemployment" into Carden's article. 
In July, the federal minimum wage rose from $6.55 per hour to $7.25 per hour(I assume that $6.55 was the equilibrium wage)...

This is a standard application of basic economic principles. Demand curves slope downward (Demand), which means that people wish to buy more of something as it gets cheaper and less of something as it gets more expensive. Supply curves slope upward (supply), meaning people are willing to do more of something as the rewards increase and less of something as the rewards decrease. In competitive markets, minimum wages create unemployment: While they draw more people into the labor market ( point A), they reduce the amount of labor companies wish to hire (point B).

In the complex American labor market, these effects may be difficult to identify, but a comprehensive survey research on minimum wages by David Neumark and William Wascher finds that minimum wages do, in fact, reduce employment. As Neumark argues in a Wall Street Journal article, the best estimates suggest that this past summer's minimum wage increase will likely destroy approximately 300,000 jobs that would otherwise be filled by teenagers and young adults (the distance between points A and B). For example, summer camps cut back on hiring in response to the weakening economy but also in response to the coming increase in the price of labor.
The price mechanism is an impersonal method of hiring.  Once the supply of labor exceeds the demand, some other mechanism must be employed.  To often this it involves prejudice. 
Under-employment among young black males and low earnings among older black males are perennial problems explained in part by the minimum wage. Minimum wages and other regulations on the labor market lock a lot of younger black males out of the labor market, which means they do not acquire as many skills as they would if they were employed. When they are older, therefore, they earn less. In the 1960s, Milton Friedman said that the minimum wage is a crime against black Americans.

There is some evidence that this is the case in the most recent Employment Situation Summary released by the Bureau of Labor Statistics. The change in the unemployment rate for all workers between July and August was 0.3 percentage points (from 9.4% to 9.7%) while the change in the unemployment rate for "Black or African American" workers was double that--0.6 points (from 14.5% to 15.1%).

For workers classified as "Hispanic or Latino Ethnicity," there was a 0.7 percentage point increase in the unemployment rate (from 12.3% to 13%). Between August and September, the Hispanic/Latino unemployment rate recovered slightly, while the unemployment rate for black workers increased again, from 15.1% to 15.4%. Workers in these categories might be disproportionately affected by the economic downturn, but they are also disproportionately affected by the minimum wage increase.

1 comment:

  1. Dena Husak, ECON student25/10/09 5:16 PM

    This minimum wage is considered a price floor. It is not a shock to me that most economists are against minimum wage laws because, if a price floor prevents supply and demand from reaching equalibrium, when comparing jobs and the amount of money available to pay employees (called a binding price floor), the market is not functioning to its maximum potential. I understand the prediction for the loss of 300,000 jobs available with the new minimum wage law. Price floors cause a surplus. Here the surplus is jobs. The quantity of labor supplied exceeds the quantity of labor demanded by 300,000 and thus there are 300,000 people out there who are unable to find jobs. I believe the book quoted that studies show an increase of 10% in minimum wage depresses teenage or low-skilled employment by 1 to 3 percent. That's a lot! Knowing this information now has turned my opinion of an increase in minimum wage 180 degreese. Growing up and working part-time, I always wished that minimum wage would increase so I could make more money per hour. But, now I know that this increase in minimum wage could leave me the one without a job at all.