Minimum Wage Debate

An increase in the minimum wage has several distinctive negative effects on the economy. While the wages of some low skilled workers would improve, it would reduce employment opportunities for teenagers and other lower skilled workers. They are pushed either into unemployment or the underground economy. A bigger minimum also raises prices of fast foods and other goods produced with large inputs of unskilled labor. Workers who receive on the job training must accept lower wages in return. A higher floor on wages prevents the wages of lower skilled workers from being reduced much, and hence discourages firms from providing much training to these employees.

A rise in the minimum wage increases the demand for workers with greater skills because it reduces competition from low-skilled workers. This is an important reason why unions have always been strong supporters of high minimum wages because these reduce the competition faced by union members from the largely non-union workers who receive low wages.

Most knowledgeable supporters of a higher minimum wage do not believe it is an effective way to reduce the poverty rate. Poorer workers who are lucky enough to retain their jobs at a higher wage obviously do better, but the poorer workers who are priced out of the above ground economy are made worse off. Moreover, many of those who receive higher wages are not poor, but are teenagers and other secondary workers in middle class and rather rich families. Poor families are also disproportionately hurt by the rise in the cost of fast foods and other goods produced with the higher priced low-skilled labor since these families spend a relatively large fraction of their incomes on such goods.

A recent petition by over 600 economists, including 5 Nobel Laureates in Economics, advocated a phased-in rise in the federal minimum. This petition received much attention, and the number of economists signing is impressive (and depressing). Still, the American Economic Association has over 20,000 members, and I believe that a clear majority of these members would have refused to sign that petition if they had been asked. They believe, as I do, that the negative effects of a higher minimum wage would outweigh any positive effects. That is one reason I would believe why only a fraction of the 35 living economists who received the Nobel Prize signed on to the petition--I believe all were asked to sign.

Controversy remains in the United States over the effects of the minimum wage mainly because past changes in the U.S. minimum wage have usually been too small to have large and easily detectable general effects on employment and unemployment. The effects of an increase to $10.00 per hour