The Effect of Raising the Minimum Wage: Is There a Market for Labor?

One often hears the claim that raising the minimum wage will cause an increase in unemployment that will hurt those in the lowest income group rather than help them. This claim seems to be based on the textbook assumption that in the area of labor there is a market that is driven by supply and demand. This tidy generalization of markets to the interactions of employers and employees in the workplace makes for nice charts in a textbook, but it need not have anything to do with reality.

James K. Galbraith addressed this issue in his book The Predator State.

"....the ‘labor market’—conceived as an interaction between forces of supply and those of demand—really does not exist, or to put it as Keynes did, in 1936, there is no supply curve for labor. The total demand for labor determines employment and that is essentially the entire story."

Let’s consider an example in order to elucidate what Galbraith means by that claim. Consider a fast food outlet where a manager has organized a team of workers as efficiently as possible to produce the product at the rate necessary to meet demand. There are no excess workers and everyone is kept busy. If raising the minimum wage causes the manager to have to pay the employees more, it will eat into his/her profits. Economics textbooks imply that the manager will choose to eliminate an employee to compensate for the increase in cost of that worker. But does that make sense. A certain number of workers are necessary to produce the required amount of product. The operation will lose money through inefficiency if product cannot be delivered in a timely manner. It makes much more sense to simply raise prices slightly to cover the increased expense.

What actually happens in practice? A brief article by Ross Eisenbrey provides a summary of recent economic studies of employment data as affected by increases in the minimum wage.

"As a 1995 paper in the Journal of Economics Literature put it, ‘There is a long history of empirical studies attempting to pin down the effects of minimum wages, with limited success.’ No one found significant employment losses when President Truman raised the minimum wage by 87% in 1950. When Congress raised the minimum wage by 28% in two steps in 1967, businesses predicted large employment losses and price increases. As the Wall Street Journal reported six months later, ‘Employment and prices show little effect from $1.40-an-hour guarantee’."

The gold standard in these studies appears to be that performed by Card and Krueger which determined that a 19% increase in New Jersey’s minimum wage did not lead to a loss of jobs.

"Nobel laureate Paul Krugman says the study ‘has stood up very well to repeated challenges, and new cases confirming its results keep coming in.’ And even the most ardent conservative critics could not claim that the New Jersey increase caused statistically significant job loss."

Even teen employment seems to be unaffected.

"University of California, Berkeley....economist Sylvia Allegretto wants policy advocates to know about recent economics research about the minimum wage because it is so clear and convincing. Allegretto and colleagues Michael Reich and Arindrajit Dube carefully studied data on teen employment from 1990 to 2009 and found ‘that minimum wage increases—in the range that have been implemented in the United States—do not reduce employment among teens. Previous studies to the contrary used flawed statistical controls and ‘do not provide a credible guide for public policy’."

Eisenbrey cites credible studies that confirm the opinion that raising the minimum wage has no significant effect on employment. Given the state of economics and the personal biases inherent in the analyses of complex data, it is assured that someone could find counter studies that would indicate an effect.

Perhaps the conclusion that should be drawn is that if economists can argue over this for decades without convincing each other that an effect does or does not exist, then any effect is too small to worry about and the value of the minimum wage should be determined by other factors.