WS>>Minimum wages and unemployment

carl william spitzer iv cwsiv_2nd at JUNO.COM
Wed Jul 16 13:09:53 MDT 2003

          by Gerard Jackson
          Melbourne: Australia

          Card,  D.  and Krueger have argued that  under  certain
     circumstances  an  increase  in the minimum  wage  will  not
     reduce employment and might even increase it. They are  half
     right.  There  is a situation where increases will  not  cut

          Economics  teaches  that raising the price  of  a  good
     reduce  demand  for it. So how can the minimum wage  be  the
     exception? It cannot. What is missing from this argument  is
     the adjective effective.

          So long as the minimum wage does not exceed the  market
     rate  it  will  not cause unemployment. Let us  take  as  an
     example  the fast food sector. Now assume that  politicians,
     ever eager to do good and get re-elected, raise the  minimum
     wage  in  this  sector without any apparent  effect  on  the
     demand  for labour. It now appears that economic theory  has
     been refuted, or at least an exception discovered.

          To  encourage this idea along come a couple  of  econo-
     mists who survey the sector to try and determine the employ-
     ment effects of the minimum wage increase. To the delight of
     our  politicians  they  find that  employment  actually  in-
     creased,  leaving  market  economists who  warned  that  the
     increase would kill jobs with egg on their faces.

          Our  two economists' discovery immediately leads  other
     do-gooding  politicians and union activists to  demand  even
     more  increases in the minimum wage, even though our  avant-
     garde  economists issue a warning that the alleged  positive
     effect  of minimum wages only holds for small  increases  in
     the wage rate beyond which unemployment will emerge.

          The  first  thing to remember about economics  is  that
     nothing  is constant. This is something critics  of  minimum
     wages tend to forget, perhaps because of the undue influence
     of static analysis.

          As  labour,  along with every other  factor,  tends  to
     receive  the  full value of its marginal product in  a  free
     market raising its cost above its market clearing rate  will
     cause unemployment. But value productivity is always  chang-
     ing.  In  a booming economy where the demand for  labour  is
     rising,  a minimum wage that would have destroyed jobs  even
     two  years ago might now be totally ineffective, giving  the
     impression that minimum wages are harmless.

          In  this situation even a significant increase  in  the
     minimum wage might have no effect on the demand for  labour.
     However, it could give the unfortunate impression, supported
     by an impressive array of statistical research, that raising
     the minimum wage will actually increase employment.

          Some argue that monopsony requires minimum wage laws if
     labour is to receive the full value of its product. But  the
     notion that labour markets are dominated by monopsony is  so
     patently absurd that the subject is rarely raised.

          In fact, the monopsony argument is usually confined  to
     a  one-factory town situation. Even here I find the  concept
     strained  and highly artificial. But it does have the  theo-
     retical advantage of showing that if such a situation exist-
     ed  attempts  to equalise wage rates with  marginal  revenue
     would  fail  because the increase in  marginal  costs  would
     exceed the wage rate. Any standard economics textbook should
     provide a diagrammatic explanation.

          Of  course,  if you subscribe to the absurd  view  that
     there  can simultaneously exist "more than  one  equilibrium
     wage"  rate if we sum up "individual supply curves"  (Debun-
     king  Economics by Steve Keen) you will happily  cause  mass

          Gerard Jackson is Brookes economics editor

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