Minimum Wage: Plenty of Empirical Evidence Backs the Theory that It Costs Jobs


George Mason University economist Bryan Caplan tips his hat to the famous Card/Krueger study, the ur-source of the belief that despite what all economic theory would tell you, the minimum wage does not lower the number of low-wage jobs; but still believes there is more than adequate empirical evidence supporting the basic theory that demand will fall as prices rise, for labor as well as other things.

It's just that the empirical data that reflects on the minimum wage debate might not always be what it looks like on first glance. Some excerpts:

All of the following empirical literatures support the orthodox view that the minimum wage has pronounced disemployment effects:

1. The literature on the effect of low-skilled immigration on native wages.  Astrong consensus finds that large increases in low-skilled immigration have little effect on low-skilled native wages….These results imply a highly elastic demand curve for low-skilled labor, which in turn implies a large disemployment effect of the minimum wage…..

2. The literature on the effect of European labor market regulation. Most economists who study European labor markets admit that strict labor market regulations are an important cause of high long-term unemployment.  When I ask random European economists, they tell me, "The economics is clear; the problem is politics," meaning that European governments are afraid to embrace the deregulation they know they need to restore full employment.  To be fair, high minimum wages are only one facet of European labor market regulation.  But if you find that one kind of regulation that raises labor costs reduces employment, the reasonable inference to draw is that any regulation that raises labor costs has similar effects—including, of course, the minimum wage.

3. The literature on the effects of price controls in general.  There are vast empirical literatures studying the effects of price controls of housing (rent control), agriculture (price supports), energy (oil and gas price controls), banking (Regulation Q) etc.  Each of these literatures bolsters the textbook story about the effect of price controls—and therefore ipso facto bolsters the textbook story about the effect of price controls in the labor market….

4. The literature on Keynesian macroeconomics.  If you're even mildly Keynesian, you know that downward nominal wage rigidity occasionally leads to lots of involuntary unemployment.  If, like most Keynesians, you think that your view is backed by overwhelming empirical evidence, I have a challenge for you: Explain why market-driven downward nominal wage rigidity leads to unemployment without implying that a government-imposed minimum wage leads to unemployment.  The challenge is tough because the whole point of the minimum wage is to intensify what Keynesians correctly see as the fundamental cause of unemployment: The failure of nominal wages to fall until the market clears.

I blogged last month on the empirics and theory of minimum wage and employment.