Minimum wage

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The effects of the minimum wage, a legally-mandated lower limit on (usually hourly) pay rates, are the subject of some controversy. Introductory microeconomics would suggest that the setting of a price floor would prevent an equilibrium between price and quantity from being reached, thereby creating a surplus of the resource or product in question.

However, if the labor market is, as sometimes theorized,[1] a monopsonistic oligopoly, the market for labor fails, as firms under-pay workers (due to the transaction costs in switching jobs). As such, depending on the level, a minimum wage might actually decrease unemployment.

Empirical evidence is mixed. David Card and Alan Krueger found that a wage increase in New Jersey increased employment in New Jersey fast food restaurants along the border of Pennsylvania (where the introductory treatment would have expected employment losses).[2] On the other hand, David Neumark and William Wascher found "[statistically] insignificant—although almost always negative" employment effects from the same hike.[3]

However, in Myth and Measurement: The New Economics of the Minimum Wage suggested publisher bias favoring studies that showed negative results. Doucouliago and Stanley confirmed this and stated "Even under generous assumptions about what might constitute 'best practice' in this area of research, little or no evidence of an adverse employment effect remains in the empirical research record, once the effects of publication selection are removed."[4] They also stated "First, minimum wages may simply have no effect on employment... Second, minimum wage effects might exist, but they may be too difficult to detect and/or are very small." Dube, Lester, and Reich (2010) [5] and Allegretto, Dube, and Reich (2011)[6] showed that there were variables unrelated to minimum wage that could account for any downturn in employment.

The November 2011 Hirsch, Kaufman, Zelenska paper "Minimum Wage Channels of Adjustment" found no "significant effect of the minimum wage increases on employment or hours over the years [studied]". In February 2013 John Schmitt published "Why Does the Minimum Wage Have No Discernible Effect on Employment?" via the Center for Economic and Policy Research stated "Economists have conducted hundreds of studies of the employment impact of the minimum wage. Summarizing those studies is a daunting task, but two recent meta-studies analyzing the research conducted since the early 1990s concludes that the minimum wage has little or no discernible effect on the employment prospects of low-wage workers. The most likely reason for this outcome is that the cost shock of the minimum wage is small relative to most firms' overall costs and only modest relative to the wages paid to low-wage workers. In the traditional discussion of the minimum wage, economists have focused on how these costs affect employment outcomes, but employers have many other channels of adjustment. "


[edit] United States

The current federal minimum wage in the U.S. is $7.25 per hour,[7] though it is higher in some states. Minimum wages in the U.S. have never been sufficient to raise a family out of poverty, if only one member of the family works. The minimum wage has varied from a maximum of 90% of the poverty level in 1968 ($10.50 /hr in 2013 dollars) and has averaged two thirds of the poverty level since 1959, when the poverty level was established.[8]

[edit] Footnotes

  1. Oligopsony appears to occur mostly in certain agricultural markets such as tomatoes, tobacco, and cocoa. Economists note that oligopsony is "scarcely mentioned" by industrial organization organization economists because "they don't think it's very important" and "don't believe it presents any unique modeling issues relative to seller market power" (Rogers, Richard T. and Sexton, Richard J., Assessing the Importance of Oligopsony Power in Agricultural Markets, Am. J. Agr. Econ. (1994) 76 (5): 1143-1150. doi: 10.2307/1243407); and that "One of the most difficult problems facing economists is to determine from market data whether or not market power is being exercised" (Richard E. Just and Wen S. Chern, Tomatoes, Technology, and Oligopsony, The Bell Journal of Economics, Vol. 11, No. 2 (Autumn, 1980), pp. 584-602). Since oligopsony is all about a few buyers exercising market power, if it is difficult to tell whether market power is being exercised, then it is difficult to determine oligopsony's existence and influence, and thus the idea that it is "widely held" that the labor market is an oligopsony is dubious.
  2. David Card and Alan B. Krueger, "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania," American Economic Review, Volume 84, no. 4 (September 1994), pp. 774-775.
  3. Neumark & Wascher, American Economic Review, Volume 90 No. 5.
  4. Hristos Doucouliagos & T. D. Stanley, 2009. "Publication Selection Bias in Minimum-Wage Research? A Meta-Regression Analysis," British Journal of Industrial Relations, London School of Economics, vol. 47(2), pages 406-428, 06.
  5. Dube, Lester, and Reich (2010) "Minimum Wage Effects Across State Borders: Estimates Using Contiguous Counties" The Review of Economics and Statistics, November 2010, 92(4): 945–964
  6. Allegretto, Dube, and Reich (2011) "Do Minimum Wages Really Reduce Teen Employment? Accounting for Heterogeneity and Selectivity in State Panel Data" Industrial Relations, Vol. 50, No. 2 pg 205-240
  7. http://www.dol.gov/whd/minimumwage.htm
  8. http://oregonstate.edu/instruct/anth484/minwage.html/
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