Minimum Wage

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.

Workers Day of Action (7/24/2012)

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.

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  1. I like the last point especially since the Keynesians are always warning of the dangers of deflation and wage stickiness.

  2. Minimum wage is not intended to raise unemployment. It is intended to give working families a living wage. Why do you oppose giving working families a living wage? Why do you hate families? Why do you hate children?

    1. I hate families because they have children.

      I hate children because they are sticky.

      1. And loud.

        Don’t forget loud.

        1. They smell like poop and spoiled milk.

          1. Especially if you never wash them.

    2. You need to lay off the wife beater fallacy. This is you only asking the question for presumption of guilt without proving how minimum wage helps the lover class. It does not because you have to factor in job loss and higher cost the will eat into any forced wage increase.

      1. His handle is ‘sarcasmic’ for a reason. Welcome aboard!

  3. LOL. None of these are actually empirical treatments of the effect of small changes in minimum wage themselves; the studies that are empirical are not about minimum wage, and the treatments of minimum wage are not empirical.

    1. You might have noticed the word LARGE there.

    2. That’s an awfully important “To be fair”

    3. Price controls run in the other fucking direction (maxima, not minima) and the ones studied are way below market prices. Again, SMALL != LARGE.

    4. This isn’t empirical at all.

    1. You are wrong on #3.

      Price controls exist in both directions.

      1. I thought all the ones listed were ceilings, not floors, but now I notice the ag price supports. I stand corrected on that part of the point.

        Of course, the analogous situation to Doherty’s point would be price floors a little bit above market value causing people to consume less ag products. Which isn’t really there.

        1. I didnt even read the list. I just no that price controls go both ways, so it didnt matter if literally listed or not.

          1. Price controls on the maximum that can be charged for something result in shortages of that thing.

            Price controls on the minimum that can be charged for something result in surpluses of that thing.

            Minimum wage — price controls setting a minimum price for labor — results in labor surpluses (i.e. unemployment).

    2. Tulpa:

      None of these are actually empirical treatments of the effect of small changes in minimum wage themselves

      Right, but looking at small changes in minimum wage and employment is not the same as considering eliminating the minimum wage, and what effect that could have on employment.

      Debating the unemployment effects of an approximate 13% change in minimum wage is missing the point.

  4. So if minimum wage goes up from $8 to $9, a business owner with large numbers of minwage employees has options.

    1. Fire 1/9 of your employees or cut back 1/9 on everyone’s hours.

    2. Raise prices by 1/8 of your labor costs per unit.

    If you choose #1, you have to produce the same product/service with less labor. That might be tough. If you choose #2, we’re talking raising the price of a $1 hamburger by a nickel or so (assuming labor costs of 40% which is probably high). Which all your competitors will be doing too, since they probably have similar numbers of minwagers. You’re much less likely to lose business with #2 than #1.

    Now if the minimum wage is increased from $8 to $20 that’s a different story. But SMALL minwage increases probably don’t effect unemployment.

    1. No, no, no! The rich business owner is supposed to take in less profits! I mean, he’s rich, isn’t he? How could he own a business and not be rich? Since he’s rich he hasn’t paid his fair share! How could he have paid his fair share and still be rich? So he’s supposed to pay for the wage increase with his unlimited profits! He can afford it! He’s rich!

    2. “Now if the minimum wage is increased from $8 to $20 that’s a different story. But SMALL minwage increases probably don’t effect unemployment.”

      If the MW law is a trailing indicator of market prices, there will be little effect.
      If it is leading, there will be measureable effects.

    3. But SMALL minwage increases probably don’t effect unemployment.

      Where are all the gas station attendants?

      Also, in your example, you left out #3: Replace employees with a machine that costs the equivalent of an $8.50 per hour employee.

      At $8, you hire people. At $9, you hire the machine.

      1. And, yes, I realize the literal answer to my question is NJ and OR.

        1. There is a full service gas station down the street from my house. Granted it’s the only one I have ever seen in the state, but it exists nonetheless.

          1. And probably for that once per day someone uses the full service section, some clerk has to run out of the quickie mart and handle them.

            But the marginal value of a full time attendant is too small to justify at current min wage levels.

            1. There’s four pumps, and the cash register is inside a caboose. I generally don’t go there because I like to swipe my debit card at the pump, and there the attendant has to take the card into the caboose and come back with a little clipboard to sign. Though I do go there if I have cash and the weather really sucks.

        2. That is about the only good thing about NJ. We have full serve and almost the lowest gas taxes, and prices are always well below the national average.

          However, they make up for it in tolls. But if you live in South Jersey, there are decent alternatives to the toll roads, like I-295.

      2. Where are all the gas station attendants?

        And theater ushers. On the other hand, note the rise of unpaid internships.

        1. Where are all the gas station attendants?

          In Oregon, because the braindead legislature outlawed customers pumping their own gas.

      3. Obama was right! Those damn ATMs took our jobs!

      4. But SMALL minwage increases probably don’t effect unemployment.

        Depending on the number of small increases over time, they can add up to a large increase.

        Of course, an isolated small increase is more likely to lag the market rate, so this may just be a way of saying that irrelevant increases don’t effect unemployment.

        1. Well yeah, but the customers’ price increases are also happening slowly over time so it’s dubious that they will suddenly decide to consume less.

          1. There is no “market rate” for all labor. Every individual has a maximum wage rate at which they can still find employment, and every point on the spectrum of possibly wages is represented, down to and below $0 per hour — as in, some employees actively destroy value, and are unemployable even if unpaid.

            So every minimum wage increase causes some previously employable people to become unemployable.

      5. #3: Replace employees with a machine that costs the equivalent of an $8.50 per hour employee.

        That would be a very unusual situation (and of course, employees cost more than their wages – payroll tax, unemployment tax, training, etc).

        1. Hence “equivalent”.

          That was meant to cover all that other stuff.

          And it isnt an unusual situation at all. It happens all the time. Generally, over time, the price of the machine drops vs labor and machines replace labor. As such, there is a time in which the machine is marginally higher than labor, but an artificial increase in labor costs would switch the order.

          Also, unusual isnt non-existent. Unusual situations may fail to show up in empirical studies, but that is a failure of empirical studies.

    4. And if prices are raised across the board, the cost of living hike partially cancels out the min wage raise, does it not?

      1. RG| 3.12.13 @ 12:33PM |#
        “And if prices are raised across the board, the cost of living hike partially cancels out the min wage raise, does it not?”

        It certainly does, and there’s another dynamic at work here causing the same result:
        Sammy just got a raise from $8 to $10/hour flipping burgers. Jack used to flip ’em, but the manager saw some talent, so Jack’s an assistant manager at $10/hour.
        Not for long; that pay scale has to change, and does so up the ladder three or four pay scales.

        1. I left a job over that very issue. I had all the duties of a manager, yet after a minimum wages hike I was only making 50 cents more an higher because they refused to raise my pay.

          1. This is unpossible. No one has ever suffered negative consequences from government action with good intentions!

            1. Or I deserve it because I was of the hated managerial class and–because of my false class consciousness–I helped in the exploitation of the noble laborers under me. I left because of capitalist greed and got what I deserved.

              1. I was going to tell to report you for re-eductiaon but it appears you’ve already been.

              2. Oh, there is little doubt that you deserved it, for one reason or another. The question was if it was negative.

          2. You know it’s because of greedy bastards like you who expect to get paid more than the underlings you supervise that make it impossible to turn this country into the progressive worker’s paradise that it should be. How can we have fairness and equality with people like you out there who insist on having more than someone else?

      2. And if prices are raised across the board, the cost of living hike partially cancels out the min wage raise, does it not?

        That’s easily fixed: when cost of living increases, just raise the minimum wage.

        1. iThat’s easily fixed: when cost of living increases, just raise the minimum wage institute across the board cost controls to force the greedy rich business owners to take the hit out of their evil profits.


          1. *price controls

        2. Where can I send my campaign contribution check?

      3. Yes, minwage increases lead to price inflation. That I agree with.

        The unemployment effect is much more dubious for small increases, however.

        1. I doubt small increases cause people to be fired or laid off, but I bet it slows down hiring for entry level and part time positions. Especially for unskilled young people. It may be worth $5 to hire some dumb ass teenager to run a cash register, but for $7.50 you might want to find someone with some experience.

          1. I doubt small increases cause people to be fired or laid off

            Minimum wage is $8 per hour. The maximum wage you, as a business owner, can pay and still make a profit is $8.40 an hour. Minimum wage is given a small increase to $8.50 an hour.

            What percentage of your employees do you fire?

            (Hint: 100%)

      4. Sure – but that makes it in real rather than nominal terms, less of an increase … or not one at all.

        Always talk real rather than nominal.

    5. “Which all your competitors will be doing too, since they probably have similar numbers of minwagers.”

      That’s quite a handwave. Defection to a competitor aside, it seems you’re assuming that overall sales volume will remain unchanged despite the price increase. And, of course, volume is also a factor in the number of employees you actually need on the clock at any one time. If an increases in prices leads to even a slight decrease in sales the owner may find that extra employee providing coverage is not be needed anymore, after all.

      How about we respect their expertise and the common sense of their employees, and stop pretending the State has a clue about what sorts of jobs people should be permitted to pursue?

      1. It’s dubious that a nickel increase in hamburger prices is going to drive business down.

        1. While that is dubious (meaning it may or may not drive business down) what ISN’T dubious is that it WILL drive margins down.

          Any business operating on an already-thin margin is likely to be put out of business when the margin is driven even lower. Those employees will be out of a job and no new operator will take its place at the same margin.

          The demand for hamburgers may not decrease overall – the customers of the now-out-of-business establishment will likely go to the competitors, the competitors will not likely see enough of an increase in business to justify hiring one of the former employees of the other establishment especially since his margin ALSO went down.

          1. Yup. Even if it doesn’t kill LocalBurger, it might make them unable to handle the next recession.

            If it has no effect, they should already be using that margin to grow or compete.

            The idea that there’s Extra Money just lying around not being used to compete suggests the underlying – if unconscious – belief that business owners/management do not desire to make money.

    6. a business owner with large numbers of minwage employees has options.

      Interesting how you focused on the word “large” in relation to the amount of the proposed increase and then used it yourself as if you had not.

      1. I’m not using “large” in reference to the increase.

        A business owner without large numbers of minwage employees is, of course, affected even less. I was using the common mathematician tactic of making unfavorable assumptions in proving my point.

        1. The effect has little to do with number of employees. It’s more about whether or not the additional cost of the labor can be mitigate through either product price increases, lower profits, greater employee productivity, or whatever. (though note here if he solution greater productivity works, future new hires slows down)

          That is based upon industry, product price elasticity, etc/etc/etc.

          It doesn’t matter whether the company employees 3 min wage or 3000 min wage employees – if they make widgets that can only sustain $8/hr for their min wage employees and min wage goes to $9/hr, they will either seek production creation elsewhere, figure out how to increase productivity, or keep losing money until they close shop and cease hiring forever.

    7. Yes, but since the price of everything goes up, they also don’t effect your real income. So, at BEST, it’s a wash. At worst, it’s a loss.

      1. Which isn’t an unemployment concern.

    8. But you’re neglecting the effect of a nickle price increase on consumer demand.

      The demand for burgers is not so inelastic that a marginal price increase will not cause a marginal decline in demand for burgers, which will result in less employment for burger flippers.

      1. Dubious. That would require a consumer to limit their burger intake because it’s $1.05 instead of $1, which would be quite the picky consumer.

        1. There’s plenty of consumers that would do just that, particularly those that purchase large amounts of hamburgers. Aggregate demand certainly decreases in the event of an increase in price, though oftentimes that decrease is disproportionate to the price increase.

        2. No, what is more likely is that someone with a 5 dollar bill will walk in and buy 4 burgers instead of 5.

        3. The likelihood of a particular consumer changing their behavior over a single nickle is very small, but a 5% increase in costs will change aggregate consumer behavior enough to affect the overall supply and demand.

          Maybe not enough to fire someone, but enough to cut everyone’s hours, or not hire a replacement for the huge turn-over found in min wage jobs.

          Your implication that a small change is too small to affect anything is what is dubious. How big does the change have to be before you think it will have an effect?

        4. Or maybe because it’s $1.04 instead of $.99.

          Obviously the 5c difference has a psychological effect, or else retailers wouldn’t price things a penny below a dollar.

          Push the price up and you have to jump to the next cutoff point. Maybe consumers don’t notice $4.69 vs. $4.89, but they’ll notice $4.99 vs. $5.19 .

          And anyway 20c less in your pocket is 20c less. Where the fuck do you think the money comes from?

    9. Re: Tulpa,

      Now if the minimum wage is increased from $8 to $20 that’s a different story. But SMALL minwage increases probably don’t effect unemployment.

      It doesn’t as long as you kill all teenagers that reach the age of employment each year. That would mean a lot of green flies, but not an increase in unemployment…

      What do you think WW2 was for, anyway???

    10. 3. Don’t hire a ninth employee and get the eight workers make up the difference.

      Considering there are a lot of unemployed people right now, this certainly doesn’t help. I just can’t believe this fucking Congress and administration keeps raising the cost of hiring labor during a recession. Even when they cut payroll taxes, they did it on the worker’s side.

    11. Somebody already mentioned a #3, so here’s #4: When little Johnny Rotten quits, you don’t bother to replace him. He wasn’t a great employee anyway, and you’d been considering firing him. You learn to live without him, since he wasn’t contributing to productivity. Turns out he mostly got in the way.

      That’s why everyone always points out that it’s the lowest skilled workers who are hurt the most.

    12. What about employers with unionized workers which practically always have their wages tied to minimum wage levels? These people are the real targets of any minimum wage hikes by government, and that is because it then allows unions to collect more money to give to the politicians. Small minimum wage increases might not cause employed people to have to be let go to cover the damage, although in the case union shops this happens, but it sure as hell kills entry level jobs. And that’s what minimum wage jobs are supposed to be.

      Don’t get me wrong. This regulation disproportionally impacts the stupid people most likely to vote for the politicians that like this practice, so I cheer them on to do more of it. Stupid should be rewarded with pain.

    13. So if minimum wage goes up from $8 to $9, a business owner with large numbers of minwage employees has options.

      The “options” may be foisted on them. If people are unwilling to pay more for the product being produced, and the minimum wage means the owner is losing money for each employee-hour, they will go out of business, which will cause unemployment.

      Your theory that small increases don’t affect unemployment is baloney — large increases are essentially a bundle of small increases imposed all at once.

    14. But SMALL minwage increases probably don’t effect unemployment.

      They don’t lead to massive layoffs, but they do increase unemployment over time by changing the optimal mix of capital and labor and by encouraging expansion of production to areas with lower labor costs.

      Again, these changes are necessarily small as the number of affected employers and employees is in the low single digits. But they are real.

    15. Tulpa:

      Now if the minimum wage is increased from $8 to $20 that’s a different story. But SMALL minwage increases probably don’t effect unemployment.

      Right. That’s why I would be most interested in exploring the effects of eliminating the minimum wage. Trying to quantify the employment effects of $8 to $9 isn’t really the issue. And just like an increase from $8 to $20 is a different story, so is a decrease from $8 to $0.

      1. And, from reading the article, I don’t see where it claims to be evaluating the effects of SMALL minwage increases. Rather, it claims to be treating minimum wages, in general.

        Why do you assume small minwage increases are being considered? Context?

  5. “If anyone deserves an A-plus this week it’s Marisela Castro, a daughter of farmworkers who turned her Social Action class project at San Jose State University into a campaign to increase the local minimum wage.”
    Yep, go to a state school and learn how to toss people out of work.

    “workers in San Jose enjoyed the nation’s single largest minimum-wage increase, a 25 percent raise”
    I’m sure that’ll be more than sufficient to end quite a few jobs.

    Read more:…..z2NLKC1qLo

    1. “Social Action class”?

      1. “Elementary Victimhood”

      2. How the fuck is that a class. It was already annoying enough that so many people thought that was what college was for. Now they are making it official?

  6. Ahhh, Professor Caplan. Very smart man. By his own admission, an “openly nerdy man.” Often wrong, never in doubt. His findings make perfect sense in his world of rational irrationality.

    1. “Often wrong, never in doubt.”
      Cite or it’s innuendo.

      1. It’s the leftist way, dude. Ad hom, ad hom, ad hom.

      2. Saepe falluntur, nunquam in dubium

        In Latin, it would look good on a coat of arms.

  7. All the utilitarian arguments aside, the most important reason against raising the min. wage is this: you have no goddamn business telling me and my prospective employee how to structure our agreement. If he wants to work for a dime an hour and unlimited blowjobs, that’s his right, as it is my pleasure right to agree to those terms if I see fit.

    1. Thank you. I get pretty sick of all the talk about effects, how big, which direction.
      The key point is a distant third-party, who knows neither the employer’s nor employee’s needs or preferences, presumes to use force to override their voluntary transaction. I don’t give a fuck what other consequences it has.

  8. I think an under-explored side-effect of minimum wage increases is increased cost of living. Any company faced with minimum wage hikes will need to choose one of three options or a combination of all: decrease in profit, firing workers and redistributing workload, or passing on price to consumers.

    Making prices higher for everyone so a few can think they’re earning more money is just as bad as higher structural unemployment.

    1. The “solution” to that is simple: Price controls.

    2. Since minimum wage hikes will hit all competitors equally, a concomitant price hike is practically baked in the cake.

      1. And since government looters’ incomes are based upon the same cost of living, more is siphoned from the productive.

      2. Not really.

        That assumes that all businesses are in the same financial condition, which is never the case. And that prices are tied to costs, when prices are very loosely tie to costs.

    3. Yes. Everyone keeps saying that the price increase won’t be noticed by consumers. WHich is absurd.

      A) EVERYONE noticed the price increase in fast food over the past few years, as the minimum wage rose from $5.15 to $7.25.
      People noticed. People are buying less fast food as a result. Many are switching to slightly more expensive food because the cost differential is so small, why not just buy the slightly priciery better quality meal?

      B) Consumers have a finite amount of cash to spend. If they are spending it on more expensive fast fod, they have slightly less to spend on other things. Thus, lower aggregate demand.

      In progressive land, of cours,e there are bottomless pits of money everywhere that can be conjured up on a whim. Not only “the rich” are money-trees, but apparently so are “consumers” who somehow never respond to marginal price increases caused by taxes or wage increases.

  9. I know a guy who owns several Burger King and Pizza Hut franchises.
    First, he doesn’t lower his profits, he passes wage increases along to customers-doesn’t take them out of his pocket. All his competitors do too so he doesn’t have to worry customers will go down the street. But he doesn’t usually lay off when the minimum goes up – heck a certain volume requires a certain number of staff. What happens is $9 will entice some teenagers into the job market who normally wouldn’t be tempted at $7.25 because they get a good allowance or want to study or something. So these kids, who tend to be “smarter” and more disciplined and future oriented replace the
    goofballs and marginal employees he’s forced to employ at $7.25.
    These are just the kids who really need a job and need to learn discipline. Now they are out on the street because middle class kids want to work for $9 but not for $7.25.

    1. There’s only so much that can be automated in a fast food restaurant.

    2. Re: Romulus Augustus,

      These are just the kids who really need a job and need to learn discipline. Now they are out on the street because middle class kids want to work for $9 but not for $7.25.


      Read my explanation why this happens.

      “As the price of labor is not allowed to move freely, employers will end up choosing more qualified employees as their opportunity cost increases. Employers would end up bidding the price of more qualified employees above normal market price, leaving those less qualified with either a wage that does not increase with improving productivity or, worse, unemployed.”

    3. “These are just the kids who really need a job and need to learn discipline. Now they are out on the street”

      These would be exactly the kids who are supposed to be ‘helped’ by this.
      The real shame is that I doubt they see the connection and will continue to vote socialist since those damn capitalists fired them!

    4. But the marginal price increase will affect the volume of food that he seels, so over time, the size of his workforce will adjust to the change in consumer demand caused by the price increase.

  10. What you guys keep forgetting is that “employers” exist solely to hand out paychecks on Friday afternoon.

  11. Minimum Wage laws create major unemployment at the unskilled end of the labor market. Over time, the problem is reflected upward in the labor market. This should not come as a surpriseL unemployment is exactly what the laws were originally intended to create. Someone with great reach has to point out the original intent of the Mininum Wage.

    Thomas C. Leonard (“Retrospectives: Eugenics and Economics in the Progressive Era”, Journal of Economic Perspectives, Vol.19 No.4, pp.207-214) said, “Progressive economists…believed…binding minimum wages would cause job losses. However, the[y]…also believed that…job loss induced by minimum wages was a social benefit[;] it performed the eugenic service of ridding the labor force of the ‘unemployable.'” “…minimum wage…operate[s] eugenically…by deterring prospective immigrants and…by removing from employment the ‘unemployable,’ who, thus identified, could be…segregated in rural communities or sterilized.”

    So, what does this mean? Governments know the minimum wage causes unemployment; they hope the American public doesn’t find out that the penalties paid by taxpayers for these government generated societal unemployables: higher taxes, more unemployables; a vicious circle. Minimum wage laws are the progenitors of the problem. In addition, the laws lead to illegal immigration because they provide an incentive for illegals to cross the border to fill (off-book) “unskilled” jobs that are left unfilled.

  12. Right-wingers don’t believe in spontaneous order in nature, left-wingers don’t believe it in economics.

  13. The premise here is that there is “plenty” of empirical evidence supporting the theory that raising the minimum wage will cost jobs. The only truth here is that ther has been a “lot” of research.

    All on this thread should read John Schmitt’s (Center for Economic Policy and Research) recent study from February 2013.…..013-02.pdf

    At the end of the day, any modest increase in the minimu wage yields consistently small effects to employment. Areas experiencing the most adjustment are: reductions in labor turnover; improvements in organizational efficiency; reductions in wages of higher earners (“wage compression”); and small price increases.

    Given the relatively small cost to employers of modest increases in the minimum wage, these adjustment mechanisms appear to be more than sufficient to avoid employment losses, even for employers with a large share of low-wage workers.

    1. All… pardon my spelling error! All thumbs! 🙂

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