David R. Henderson  

The Coming Minimum Wage Increase

McCraw's Marginal Mistake... Russ's Challenge...

Early in the Great Depression, President Herbert Hoover made things worse by persuading big businessmen to keep wages high. At those high wages, employers wanted to employ fewer people than otherwise. We are about to suffer another small dose of Hoover economics. Economist David Neumark points out in today's Wall Street Journal that the federal minimum wage will rise from $6.55 now to $7.25 in July. Writes Neumark:

The best estimates from studies since the early 1990s suggest that the 11% minimum wage increase scheduled for this summer will lead to the loss of an additional 300,000 jobs among teens and young adults.

The whole piece is worth reading.

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CATEGORIES: Labor Market

COMMENTS (13 to date)
spencer writes:

average earnings of employees:

% change


If you look at the data it appears that Hoovers attempts to keep wages high were a complete failure.

How can you look at the data of what happened to wages under Hoover and claim he kept wages high?

I give up. What are you looking it that tells you Hoover and businesses kept wages high?

Ironman writes:

Neumark's 300,000 sounds like the right ballpark. In 2007, with otherwise robust economic growth (it averaged an annual 4.8% in the second and third quarters of the year), the average number of employed teens dropped by 245,000 from 2006's average level.

spencer: Earnings were sustained higher in the years you cited compared to what worker productivity levels would support. Ultimately, that situation wasn't rectified until mid-1943, which coincides with the end of the Great Depression.

Blakeney writes:


I'm speculating a bit here, but I suspect that the drop in average earnings that you cite above was caused, at least in part, by changes in the distribution of jobs. Unemployment increased dramatically during 1930-33 (37% for non-farm workers in 1933), and it's likely that not all sectors were affected equally. If the higher-paid jobs were preferentially cut, then you'd see a drop in average earnings, even if no individual worker experienced a reduction in pay (other than, you know, losing his job completely).

Just my hypothesis. The data knows the answer.

El Presidente writes:


Would you prefer expanding/increasing the EITC or are you opposed to downward redistribution on principle, regardless of the method?

David R. Henderson writes:

To Spencer,
Read pp. 90-95 of Richard K. Vedder's and Lowell E. Gallaway's Out of Work.

To El Presidente,
Your question requires a longer than one-sentence answer, which I will provide later today after I've worked on my day job.

Mr. Econotarian writes:

I bet at least 10% of those 300,000 young adults forced out of formal employment will find employment elsewhere...in the illegal drug dealing sector.

Colin K writes:

Also, let's not forget that of the (relatively) few people officially "making minimum wage," a substantial number are probably being paid minimum wage plus some additional amount under the table. Back in college I drove a delivery truck for a while, and I was being paid ~$5/hr legally and $4/hr in cash on the side.

If the minimum wage went from $5 to $8, my pay would have gone down as the "taxable" portion went up while my gross pay stayed mostly the same.

So, the end result may be to not reduce employment very much while increasing tax revenue and reducing after-tax income for lower-wage workers.

spencer writes:

Ironman -- as soon as the economy started growing in 1934 wages started rising and rose for the rest of the 1930s.

If wages were too high in 1932, why did they go up in 1934?

Moreover, the claim was that Hoover held up wages artificially. Where is the evidence that he kept wages high when they were falling throughout his administration and started rising almost as soon as his administration was over?

that is what I was asking, not what wages were relative to productivity.

Your reply does not address my point.

Mr. Econotarian writes:


2005 National Survey on Drug Use and Health (NSDUH) reported that nationwide over 800,000 adolescents ages 12–17 sold illegal drugs during the twelve months preceding the survey.

spencer writes:

average hourly earnings:

% Ch

1921 -7.3
1922 -5.9

1930 -1.8%
1931 -7.3%
1932 -13.7%

Wages fell more under Hoover than they did in the
1921-22 recession.

JB writes:

spencer, are those real or nominal changes in wages?

David R. Henderson writes:

According to the data in Out of Work, the book I mentioned above, real wages rose by 12% between the fourth quarter of 1929 and the first quarter of 1932. See the table on p. 84.

El Presidente writes:


You left me hangin' here, buddy.

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