Setting a High Minimum Wage

There’s a discussion at the New York Times over the effects of the setting too high a minimum wage. Two economists say that setting too high a minimum wage will slow the rate of job growth and prevent many young or unskilled workers from finding work. A lawyer and a venture capitalist say it would be beneficial.

Economist Arindrajit Dube muses that we’re conducting a real life experiment:

The good news is that the somewhat long ramp-up period in Seattle will provide us with an occasion to learn from this experiment and offer opportunities for course corrections. So we need to be open to evidence on what we see on the ground: if Cylons increasingly occupy check-out counters at the Space Needle while humans ring up the Big Macs in Tacoma and Portland, voters in the Emerald City would be well advised to recalibrate their wage standard. But if it turns out businesses can absorb this increase without a substantial reduction in less-skilled employment, then it’s the rest of the country – and dare I say the economics profession – that might need a rethink.

While I agree that more knowledge is necessary I think he errs in believing that course corrections are possible. I think that minimum wages operate as ratchets and once set are politically nearly impossible to revise downwards. You can only wait until inflation reduces the wage in real dollars for you, wreaking havoc with the local economy along the way.

My understanding is that the scholarship suggests that a moderate increase in the minimum wage doesn’t have much effect on employment or job creation but that the consensus among economists is that large increases in the minimum wage will in fact reduce both.

I think it’s possible that local conditions might warrant an increase in the minimum wage but that such increases might have consequences that reach well beyond the original locality. We’re seeing that right now. I can believe that a $15 minimum wage in Seattle where the unemployment rate is 5.3% can be absorbed by the local economy. Seattle’s local minimum wages incentivizes politicians in Chicago where the unemployment rate is 10.6% to push for our own $15 minimum wage and here it might well throw people out of work or make it harder for them to find work. Not to mention driving businesses on which the poor depend out of the city or even out of the state.

Chicago politicians can always deny responsibility on a “hoocoodanode” basis.

3 comments… add one
  • Ben Wolf Link

    I would suggest the idea that a minimum wage can damage employment (at the national level) is true only if one assumes the existence of a labor market where buying patterns determine labor and capital intensity. If a product becomes expensive due to labor costs the employer will substitue more capital and lay workers off, so the example goes.

    But if there is, as Keynes wrote in the General Theory no labor market and wages are determined by effective demand? Then a wage increase at the bottom will not increase unemployment but will increase botb productivity and demand for labor.

    We have known definitively since the capital debates that marginal productivity is a wash and that falling wages do not increase employment. I think it unlikely rising wages will decrease it.

  • I’ll need to return to the General Theory. Your explanation doesn’t strike me as quite right. In particular I don’t think that Keynes rejected the notion of a market for labor per se but saw that there were many labor markets and that low aggregate demand could lead to a vicious cycle.

  • Ben Wolf Link

    Take a look at Chapter 2 and let me know what you think. My interpretation is that Keynes renounced the existence of a labor supply curve.

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