Do minimum wage laws destroy jobs?
Economists have long contended that imposing a minimum wage above a market-established level will destroy jobs. But several years ago, U.S. economists David Card and Alan Krueger looked at the effects of a big minimum wage increase in New Jersey in 1992 and came to the conclusion that it actually increased employment in the fast-food industry there. Card and Krueger no longer insist that the higher minimum pushed employment up now admitting that it "probably had no effect."
Then economists David Neumark and William Wascher reviewed and revised the New Jersey data and announced that true to expectations the rise in the minimum had, indeed, reduced employment.
Now the two pairs of economists have reviewed each other's work, made adjustments and come somewhat closer to agreement. Their arguments appear in the latest issue of the American Economic Review.
Neumark and Wascher have lightened their emphasis on falling employment, emphasising instead their conviction that employment did not go up.
Meanwhile, economist Thomas Michl has suggested that the minimum-wage increase has left the overall number of workers employed roughly the same, but reduced their hours.
Finally, Peter Tulip, a Federal Reserve economist, joined the fray by focusing on the impact of the minimum-wage increase on the labour market as a whole. He suggests that increasing the minimum raises wage growth and hence inflation across the economy.
He contends that the gradual fall in the relative value of America's minimum wage over the past 20 years explains 1.5 percentage points of the fall in the country's equilibrium rate of unemployment over the same period.
That would explain why unemployment is so much higher in continental European countries where the minimum is set high than it is in lower-minimum countries such as the U.S. and Britain.
Source: Debating the Minimum Wage, Economist, February 3, 2001.
For more on Employment Effects http://www.ncpa.org/hotlines/min/employ.html
RSA Note: A factor that is not mentioned in the above article is the level at which the minimum wage is set relative to other wages. For example, introducing a minimum wage of R2,000 per month in South Africa would cause a large number of people to lose their jobs but if the minimum were to be fixed at R200 per month it would have no effect on employment.
Eustace Davie, Director, FMF.
Publish date: 15 March 2001
The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.