What’s the Empirical Evidence?

As I read this article at Forbes on the impact that raising the wage paid to McDonald’s workers to $15 per hour would have on the price of a Big Mac (they say $.68), it made me start thinking about raising the minimum wage more generally. I think that whether you believe in raising the minimum wage depends on other beliefs, particularly what you think about the price elasticity of labor.

The “price elasticity of the demand for labor” means, roughly, the effect that increasing or decreasing a wage has on the number of people employed. If you think that an increasing wage has no effect whatever on the number of people employed, that means you think that when the minimum wage rises it has no effect at all on the number of people who are employed. If you think that it has a lot of effect, presumably you think that raising the minimum wage would cause lots of jobs to be lost. I think that this is a completely empirical question. I don’t think the answer can just be deduced from first principles.

In the case of McDonalds I would guess that the price elasticity of labor would be related to the price elasticity of a Big Mac. Does anybody have any empirical information on that? I would guess that McDonalds does.

4 comments… add one
  • steve Link

    Have ben having this argument off and on with Boudreaux. He thinks first principles are sufficient, we dont need studies or data. Part of that anti-science libertarian thing I think. That makes me unhappy. Going over the dozens of papers on the issue, there is no clear conclusion. My best guess is that there is an effect, but with the fairly small increases we have had in the past, any effect has been difficult to find, i.e. it doesnt matter that much. We dont have any experience with large increases of this magnitude. I would expect large increases to have negative effects on employment.

    Steve

  • I think the issue is complicated. For example, I doubt there are many college professors who are eating Big Macs on a daily basis (even if it is the “perfect food” as has recently been claimed) but quite a few people in the lowest income quintile are. Doubling the minimum wage and adding $.68 to the price of a Big Mac could actually cause the number of Big Macs consumed to increase, at least in the short term. Assuming no loss of jobs due to the increase, of course.

    Another complication: business models depend on certain assumptions. There could well be some wage level beyond which it doesn’t make sense to try to operate a McDonalds franchise any more. Or, as you suggest, there may be a “putting a frog in a pot and bringing it to the boil” factor.

  • Sam Link

    I think overall employment does not suffer much because higher quality employees replace the marginal ones. Political Calculations has a minimum wage vs. teen employment correlation that’s pretty convincing.

    Take a drive over to Southern Ontario where the minimum wage is over $10 now. It was a shockingly different McDonald’s experience than what I get here in Az. It seemed almost exclusively staffed by ex stay at home moms whose kids have grown up. The place was impeccably clean, the service was courteous and the order was correct.

    Overall employment tells you nothing about how the the marginal worker is doing.

  • jimbino Link

    First of all, if the minimum wage were increased, not only would the number of employees be reduced, but so would their character, since at some point law students would drop out and start making hamburgers.

    Secondly, let’s assume the minimum wage were raised to $25/hr. Not only would the number of employees be reduced, but McDonald’s itself would fold. I’m a physicist, and we work this way: we graph the relation between %jobs lost on the vertical axis against minimum wage on the horizontal axis. At $7.25 per hour (the current minimum wage), no jobs are lost (by definition), so we put a datum point there. At $25 per hour, all the jobs will be lost, so we put a datum point there. Then we draw a straight line between the two. This represents a good guess. Of course, the line might be wavy, but there is no reason to think that it will be reflexive (i.e., at no point will raising the minimum wage lead to more employment, whatever the shape of the curve). This is called a “monotonically increasing” curve, which is quite normal. I consider it the duty of anybody advocating a minimum wage of any kind to show that raising it increases total or average income, wealth, opportunity or any other thing of positive social value. Unless you think making everyone equally poor and miserable is positive.

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