Does Raising the Minimum wage cause Unemployment?
The evidence that doesn’t uphold the conventional economic thinking attached to the law of supply & demand.
In introductory economics, economists
make a ton of assumptions and that’s mainly based on the laws of supply and
demand. As the law suggests, when the price of something increases, the demand
plummets. In this case, when the minimum wage of the labourer's increases above
the equilibrium rate or the going rate, companies, in turn, hire fewer workers,
prompting unemployment. For instance, an excerpt written by Milton Friedman
goes as follows. In 1966 when the United States decided to increase the minimum
wage, he wrote the following –
The fierce debates on minimum wages
have been mindboggling mainly in the west. The two sides of looking at minimum
wage are quite different. On the one hand, raising the minimum wage is known to
curb poverty as it would put more money in the hands of labourers, while on the
other it is known to curtail the profits of the companies, ultimately hurting
the total employment of the labour market. While the latter view has gained
significant prominence in recent times, yet the new evidence doesn’t support
the traditional conclusion. Many economists have questioned this model and in
particular the late Alan Krueger, and this year’s noble prize winner in
economics David Card.
In the United States, the federal
minimum wage hasn’t budged for 14 years, and many are against raising the minimum
wage, including former president Donald Trump. However, the new evidence
supports a different conclusion.
The New Evidence by Alan Krueger and
David Card –
The late
Alan Krueger (also the former United States Secretary of the Treasury for
economic policy) and David Card (2021 Noble Prize winner in economic sciences)
published a paper in, 1993 presenting a different perspective of looking at
wages. They used a natural experiment to study the effects of minimum
wage on employment numbers. Before their paper, the literature believed that
higher minimum wages could increase unemployment since companies would have to
pay a larger share of their profits ultimately prompting them to cut their
costs. Card and Krueger studied employment rates in about 410 fast-food
restaurants in two different states namely, (Eastern) Pennsylvania, and New Jersey.
New Jersey changed their wage from $4.25 to $5.05 per hour a year, while
Pennsylvania did not. Intuitively they found no evidence supporting the fact
that increasing minimum wage caused employment to fall (or unemployment to
rise).
Despite the increase in wages, full-time-equivalent employment increased in New Jersey relative to Pennsylvania.
-
Alan Krueger and David Card
Below is the
chart that depicts the employment figures in Eastern Pennsylvania, and New
Jersey that was described by Krueger and Card’s work.
Figure
1 - Effect of increasing the minimum wage -
As shown in figure 1, the analysis exhibit
that employment in New Jersey was not affected even after raising the minimum
wage on April 1st, 1992, from $4.25 to $5.05. Similarly, without any
change in the minimum wage, employment was not affected significantly in
Eastern Pennsylvania either.
Moreover, various other studies that
refute the claim of how unemployment doesn’t rise with an increase in minimum
wages have given strong supportive arguments. In a 2013 report, the Centre
for Economic and Policy research studied the minimum wages and found that
the cost shock of minimum wages is modest relative to most of the firm’s
overall cost. Apart from it, the key point to note is that labourers are not
only wage earners but also consumers. Raising the minimum wage is an effective
way to boost economic activity within the country.
Raising the minimum wage is also one
of the best ways to tackle gender inequalities, and in reducing government
programs. According to the data from the Economic Policy Institute, 39% of
Black women and Latina women would benefit from a rise in the minimum wage.
Likewise, 38% of African American workers and 32% of women workers would
benefit. Hence, an increase in the minimum wage is an excellent way to curb
gender inequalities. As regards government programs, higher minimum wages also
reduce the reliance of workers who depend on government assistance. To support
this view, the 2016 study by Economic Policy Institute found that, increasing the
minimum wage for low wage workers would unambiguously reduce the net spending
on public assistance, particularly among workers that are likely to be affected
by the federal minimum wage increase.
All in all, a plethora of studies and
modern evidence supports the fact that increasing the minimum wage doesn’t
really have an impact on employment figures. The influential work mainly by David
Card and late Alan Krueger have completely revolutionized the
thinking of minimum wage. Along with it, the Noble Prize in Economic Sciences
awarded to David Card (in 2021) has further transformed thinking and has
probably made the subject of minimum wages more respectable. Although the only
unfortunate aspect is perhaps the fact that Noble Prize isn’t awarded
posthumously, and there are only a ton of mentions regarding the contributions of
the late Princeton economist Alan Krueger along with David Card.
-
Nirav Shedge
References -
Matthews, D. (2019, March 19). What Alan Krueger
taught the world about the minimum wage, education, and inequality. Eastern
zone: VOX.
Sklar, H. (2021, February 24). Google .
Retrieved from Business for a fair minimum wage. https://www.businessforafairminimumwage.org/news/00135/research-shows-minimum-wage-increases-do-not-cause-job-loss
The Nobel Prize . (2021, October 11). Google .
Retrieved from The Nobel Prize : https://www.nobelprize.org/prizes/economic-sciences/2021/press-release/
Well written👍
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