Friday, February 15, 2013

Department of Labor: Minimum Wage Causing Unemployment Is a Myth

From the Department of Labor:
The president's plan to raise the federal minimum wage will benefit 15 million American workers, and have a positive effect on the economy. Still, there are some common myths about raising the minimum wage. We checked in with our Chief Economist Jennifer Hunt[...: 
Myth: Raising the minimum wage reduces employment. False Minimum wage increases have little or no adverse effect on employment as shown in independent studies from economists across the country. Additionally, a recent letter by leading economists including Lawrence Katz, Richard Freeman, Joseph Stiglitz and Laura Tyson points out that "[i]n recent years there have been important developments in the academic literature on the effect of increases in the minimum wage on employment, with the weight of evidence now showing that increases in the minimum wage have had little or no negative effect on the employment of minimum wage workers, even during times of weakness in the labor market.
Here's Murray Rothbard slamming this kind of nonsense:
In truth, there is only one way to regard a minimum wage law: it is compulsory unemployment, period. The law says: it is illegal, and therefore criminal, for anyone to hire anyone else below the level of X dollars an hour. This means, plainly and simply, that a large number of free and voluntary wage contracts are now outlawed and hence that there will be a large amount of unemployment. Remember that the minimum wage law provides no jobs; it only outlaws them; and outlawed jobs are the inevitable result.

All demand curves are falling, and the demand for hiring labor is no exception. Hence, laws that prohibit employment at any wage that is relevant to the market (a minimum wage of 10 cents an hour would have little or no impact) must result in outlawing employment and hence causing unemployment.

If the minimum wage is, in short, raised from $3.35 to $4.55 an hour, the consequence is to disemploy, permanently, those who would have been hired at rates in between these two rates. Since the demand curve for any sort of labor (as for any factor of production) is set by the perceived marginal productivity of that labor, this means that the people who will be disemployed and devastated by this prohibition will be precisely the "marginal" (lowest wage) workers, e.g. blacks and teenagers, the very workers whom the advocates of the minimum wage are claiming to foster and protect.

The advocates of the minimum wage and its periodic boosting reply that all this is scare talk and that minimum wage rates do not and never have caused any unemployment. The proper riposte is to raise them one better; all right, if the minimum wage is such a wonderful anti-poverty measure, and can have no unemployment-raising effects, why are you such pikers? Why you are helping the working poor by such piddling amounts? Why stop at $4.55 an hour? Why not $10 an hour? $100? $1,000?

It is obvious that the minimum wage advocates do not pursue their own logic, because if they push it to such heights, virtually the entire labor force will be disemployed. In short, you can have as much unemployment as you want, simply by pushing the legally minimum wage high enough.

It is conventional among economists to be polite, to assume that economic fallacy is solely the result of intellectual error. But there are times when decorousness is seriously misleading, or, as Oscar Wilde once wrote, "when speaking one's mind becomes more than a duty; it becomes a positive pleasure." For if proponents of the higher minimum wage were simply wrongheaded people of good will, they would not stop at $3 or $4 an hour, but indeed would pursue their dimwit logic into the stratosphere.

The fact is that they have always been shrewd enough to stop their minimum wage demands at the point where only marginal workers are affected, and where there is no danger of disemploying, for example, white adult male workers with union seniority. When we see that the most ardent advocates of the minimum wage law have been the AFL-CIO, and that the concrete effect of the minimum wage laws has been to cripple the low-wage competition of the marginal workers as against higher-wage workers with union seniority, the true motivation of the agitation for the minimum wage becomes apparent.

This is only one of a large number of cases where a seemingly purblind persistence in economic fallacy only serves as a mask for special privilege at the expense of those who are supposedly to be "helped."


  1. What a crock of sh*t from the labor dept. Just think through it logically. If you had to pay $10 for an item worth $5, wouldn't you want to have an upgraded item? Labor is no different. If you have to pay more, you will expect more capability from that employee. Besides that, minimum wage laws are a violation of freedom of contract.

  2. Well, if Stiglitz said it was a myth then, oh well!

  3. The tuna canning industry moving out of American Samoa several years ago is proof that minimum wage laws can and do affect employment negatively. Besides, it's pretty much common sense that if you're paying an employee $7.25 per hour, and they produce an average of $8.50 per hour in revenue, then you will lay them off if you have to start paying them $9.00 per hour, unless you want to lose money.

  4. If it has no impact, raise it to $20. Or why stop ther? If wages are the sole factor in jobs, wealth, and living standards, make the minimum wage $100 an hour, or $1,000. That way no one working will ever have to worry about money ever again!!!

  5. Even my 11th grader understands that raising the minimum wage screws her fellow teens from finding work. I would also like to see a list of the "studies". We all know that Obama's economic adviser Alan Krueger's study stating that increasing the minimum wage did not reduce overall employment (I think he even said it caused employment to increase) was found to be found to have fraudulent data and yet I saw it quoted in a WSJ article as a source.

    If you go to the Chicago School's website where economists from all over the country post opinions on various chosen topics you will find that this is one most agree will produce less employment and not more. I think nearly every economist understand that the more something costs (except Veblen goods), the less demand there will be for it. The issue is simply one of price elasticity.

  6. Hi Guys,

    Good insight. All I know about minimum wage and unemployment is what I've learned in a basic MBA econ class and it seems pretty intuitive to me that at least some jobs will be lost as a result of any increase. Sure, there are some jobs where it would still be profitable for an employer to pay someone at the higher rate and for those employees such a change is likely positive. But obviously at least some jobs will be lost.

    One sad fact however is that these insightful comments are found on " where it's safe to say the readers know and care about sound economic policy whereas the masses of the US population surely do not. In today's political atmosphere emotions rule the day and it seems that every logic or reasoning is expressed the result is blank stares or accusations of not caring about the less fortunate.

    Sad but true, my generation (I'm 29) is gonna get stuck with the bill for the poor decisions that are made today.

  7. "Myth: Raising the minimum wage reduces employment. False Minimum wage increases have little or no adverse effect on employment as shown in independent studies from economists across the country. "

    Which "studies"? Do these studies control for the effects of credit-induced booms? How do these studies, then, "Prove" that water isn't wet?

  8. It took me about two seconds on Google to find these studies cited in a report from the Center for Economic Policy and Research published just this month: Dube, Lester and Reich (2010); Allgretto, Dube and Reich (2011); Hirsch, Kaufman, Zelenska (2011); Sabia, Burkhauser and Hansen (2012). Always good to check the facts before you launch into a debate and risk sounding opinionated and uninformed rather than intelligent. Just sayin.

    1. Wow, an ideological rant in response to empirical evidence. And the perennially silly "why not $100/hr ?" strawman.

      That's really going to convince non-libertarians everywhere.

  9. The same amount of work still needs to be done, and workers are still needed to do that work. With the vast increases in productivity over the past 40 years, during which time the minimum wage has fallen in relation to inflation, most minimum wage workers are providing in excess of $40/hr or $50/hr in value. As long as the minimum wage is kept under half of that value employment will not fall with an increase in the minimum wage.

    Currently the minimum wage is under $10/hr, or less than a quarter of the value provided by those earning minimum wage. We could double the minimum wage without seeing negative effects from unemployment. Actually, we would probably see employment increase due to the increased effective demand for goods and services due to more people having disposable income.