David R. Henderson  

The Right Minimum Wage Question

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Like Bryan, I received the same request from the same friend: what question(s) would I want to put on a survey of economists. My response was that I would want the question on the minimum wage asked accurately instead of sloppily. Here's how the issue was posed in the famous 1976 survey that was reported in J. R. Kearl, Clayne L. Pope, Gordon C. Whiting, and Larry T. Wimmer, "A Confusion of Economists?" American Economic Review 69 (May 1979): 28-37:

A minimum wage increases unemployment among young and unskilled workers.

Of 211 economists who responded, 90 percent agreed, or agreed with provisions, with this statement. In an early 1990s survey, the percent agreeing or agreeing with provisions had fallen to 80 percent. In a 2000 survey, reported in Dan Fuller and Doris Geide-Stevenson, "Consensus Among Economists: Revisited," Journal of Economic Education (Fall 2003): 369-387, it was posed as:

Minimum wages increase unemployment among young and unskilled workers.

Of the economists surveyed, 74 percent agreed or agreed with provisions.

What's wrong with these statements as posed? Two things. First, when I teach about the minimum wage in class or even talk about it in interviews, I take pains to point out that the minimum wage can price people out of work but not make them unemployed, because of the way unemployment is measured. To be officially unemployed, you must be out of work, available for work, and looking for work. But what if a youth priced out by the minimum wage gives up looking for work? Then he will no longer be officially unemployed. Had I been one of the economists surveyed, I would have been tempted to agree with provisions, the provision being that the person keeps looking for work or that we measure unemployment more inclusively. But I can imagine some economists who are sticklers for accuracy saying that they disagree even though they would agree that the minimum wage prices people out of work. How many such economists? Probably not many. But why set up the question to cause such a problem when there's a simple word fix?

The second problem is what we learned in my Ph.D. program at UCLA to call a "changes versus levels" problem. If the minimum wage has been constant for a while, it will not increase unemployment or reduce employment. It will just make employment less than otherwise. Indeed, a constant-dollar minimum wage will, when there is inflation, price more people in over time, as the $3.35 minimum wage did in the 1980s.

Here's the fix:

A minimum wage causes employment of young and unskilled workers to be lower than if the minimum wage did not exist.

Can anyone hone it further?


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COMMENTS (32 to date)
Tom West writes:

The trouble is that the question is irrelevant. Unless the increase in unemployment is *significant*, who cares?

It's like those questions that point out how increased regulation saves lives. Absolutely true. However, the question is not "do you want to save lives?", it's "how much are you willing to pay in exchange for saving lives?"

So, the real question is:

Is the increase in unemployment caused by minimum wage laws worth the increased wages that go to low-paid workers?

Unless, of course, one is not interested in evaluating trade-offs, but instead want to sell a pre-determined policy.

Daniel Kuehn writes:

I don't think your change is any different from how people read the original question. It's unspecified what the comparison is in the original phrasing, so I think people will think about it in terms of the counterfactual of no minimum wage, just as you write it.

I agree with Tom West on the most important phrasing. The steady decline in people who agree is probably a Card and Krueger effect. The important question is how people feel about the trade-off.

I've noticed this on health reform too. Some economists point out the problems associated with health reform as if the economist supporters of health reform don't realize the associated problems. They do. The question is - are there equity issues or some other normative issues that result in a difference of opinion.

Even among your 74% of people who still agree that the minimum wage increases unemployment, I'm sure there is a portion of people who nevertheless support the minimum wage.

Sonic Charmer writes:

So, the real question is:

Is the increase in unemployment caused by minimum wage laws worth the increased wages that go to low-paid workers?

This is not an economic question, though; it is a moral and political question as it requires one to place a value judgment on 'worth' and evaluate tradeoffs between the needs/desires of some vs others. So economists are no better equipped to answer this question than anyone else, and I am no more interested in economists' answer to this question than I would be of anyone else's.

I would prefer to stick with Arnold's phrasing. Economists' answer to that question could then be used to help inform one's answer to the question you prefer. In short: it's pretty hard to properly address the question of whether the benefits from minimum-wage laws are 'worth' the unemployment they (may) cause, unless/until we can get economists on the record as stating definitively that they indeed have this effect.

Anonymous writes:

How about:

To the extent that a minimum wage has any effect, it causes the employment of young and unskilled workers to be lower than if the minimum wage did not exist.

This takes care of the fact that if the minimum wage is set low enough it won't have any effect at all.

Bill Woolsey writes:

I have some more questions inspired by Tom West.

True or False:

1. It is better not to work at all than to work at a low wage.

2. You can't make an omelet without breaking eggs. A handful of unskilled workers should be sacrificed for the good of unskilled workers as a class.

3. A responsible economist will tell a Noble Lie if "truth" will interfere with helping unskilled workers as a class.

indregard writes:

I believe many people believe a minimum wage might have long-term positive effects on employment, yes, and more generally on efficiency, because it works as a signal to young people: Educate yourself to reach productivity above that threshold. It does also signal a positive message (in a fuzzier language, more similar to the actual language a young person would think in): If you get the expected education, you will get a job with a wage at least this high.

The relevance to your question is this: You need to point out in what time frame this effect is suppose to work. In the short run, surely most people would believe minimum wage to reduce employment. In the long run, it's a much harder question to answer. The best idea is probably to ask both questions.

David C writes:

I think Tom West's question can be revised into an economics question.

Do you agree or disagree with the following statement:

Relative to a system without a minimum wage, the current minimum wage decreases the average amount earned by the average individual. Please note that the average individual includes individuals who are employed and those who are unemployed.

If no, do you agree or disagree with the following statement:

A minimum wage causes employment of young and unskilled workers to be lower than if the minimum wage did not exist.

I think this answers the question of whether or not minimum wages work without getting into philosophical implications although there may be a way to modify the statement for brevity and/or clarity.

Eric H writes:

How about:

Are minimum wage laws biased in favor of skilled workers?

Or:

Do minimum wage laws increase the number of hours worked? If so, for whom: Skilled or unskilled workers?

Or:

Do minimum wages increase the likelihood of on the job training for low-skilled or unskilled workers?

I would like to know more about the effect the minimum wage has on consumer prices. If it increases them, then what it the point of a minimum wage? According to minimum wage advocates, minimum wage earners aren't just teenagers on summer jobs with mom and dad to pick up the tab for room and board. Minimum wage earners include single mothers, the elderly poor, former convicts, etc. Won't they bear the cost of their own wage increase in the form of higher prices for consumer goods?

Les writes:

I am often puzzled by people who would never dream of venturing an opinion on rocket science, nuclear physics or brain surgery, but who boldly opine on economics, on which they are just as well-informed as they are on rocket science, nuclear physics and brain surgery.

Ryan Vann writes:

Excellent questions asked by Mr. Woolsey.

Anyway, to address the original post, I think the question should be framed as a positive. It should be, "do you believe minimum wages tend to increase the number of employed?" Don't include the word unemployment rate, or the word rate at all, just pose it in absolute numbers and tendencies.

All these provisions and caveats just lead to a murky question, with even more murky answers.

Ryan Vann writes:

Les,

Why do you assume the average person is equally informed about economics as rocket science? It would seem to me, the average person at least has basic first hand experience as an economic agent, and is thus more knowledgeable about the matter than extremely specialized physical sciences.

Eric H writes:

Les--

There is nothing stopping anyone from uttering opinions on any subject. Opinions are ubiquitous, but well-reasoned and informed ones can come from anywhere.

I second Ryan Vann; all human beings make choices about how to deal with scarcity and thus all are qualified in some way to appreciate and discuss economics. Everyone, to one degree or another understands cost, whether in terms of opportunity foregone or money spent, or both.

Charley Hooper writes:

A minimum wage law that prohibits wages below, for example, one cent per hour, would have no positive effect on wages nor negative effect on employment.

The supporters of minimum wage laws must believe that the laws increase wages for some workers. The question is, at that point, what happens to employment rates?

How about this wording?

When wages mandated by a minimum wage law are high enough to potentially increase the wages of some workers, does this also reduce employment, especially among the young and unskilled?

eric mcfadden writes:

Take out minimum wage and put in price floor. Word it like you would talk about government support of the price in sugar or steel.

"Does a price floor for labor change outcomes for suppliers?"

Steve writes:

Ignorant question: What reasoning do the 10% of economists who don't believe that the minimum wages decreases employment rates use?

Tom West writes:

1. It is better not to work at all than to work at a low wage.

I think society has answered that one fairly clearly. There's all sorts of jobs that we chose not to allow people to perform, specifically those that are too dangerous.

For a class of jobs that the majority feel we're better off without: garbage pickers. Those that roam open garbage dumps looking for re-usable or recyclable materials.

For better or worse, I don't think most citizens want that class of job available in our society.

2. You can't make an omelet without breaking eggs. A handful of unskilled workers should be sacrificed for the good of unskilled workers as a class.

*Every* policy decision is choosing to favor one group over another group. The statement is essentially a tautology.

3. A responsible economist will tell a Noble Lie if "truth" will interfere with helping unskilled workers as a class.

Interesting. I suspect that economists, like many people, will provide a "gestalt" answer to a specific question. In other words, since many economists feel that a minimum wage is a net gain for society, they give an answer that reflects their over-all positive opinion rather than exactly answer the question that is posed.

Essentially, if you're fairly certain that the question will be used by itself to oppose policy you agree with, you're very likely to answer the unspoken global question instead of the question that was actually asked.

Tom West writes:

I am often puzzled by people who would never dream of venturing an opinion on rocket science, nuclear physics or brain surgery, but who boldly opine on economics, on which they are just as well-informed as they are on rocket science, nuclear physics and brain surgery.

You're kidding, right? Economists are one of the few occupations where a significant number opine on how people and society should live. (You'll also find an astounding number of people have opinions on climatology...)

I assure you nobody would care or comment on economics if it had as little effect on their daily lives as rocket science, nuclear physics or brain surgery.

Truly, the odd part is that given that economics is only one aspect, and often not the most significant aspect, of people's lives, economists often put forward very strong opinions that they feel are backed by their professional knowledge about how society should be arranged.

[Sorry about picking on economists, but let's be fair...]

HispanicPundit writes:

Another problem I have with how it is framed is that the question does not take into account levels.

For example, a minimum wage of 25 cents is not going to do much to the employment of teenagers - positive or otherwise. Some economists, when asked about the minimum wage increase, may think that the current levels are historically low, and so a raise would not have a noticeable impact.

A better question would be: A minimum wage, if it were to have an impact at all, causes employment of young and unskilled workers to be lower than if the minimum wage did not exist.

David C writes:

To Steve:

http://angrybear.blogspot.com/2006/12/minimum-wage-policy-by-alex-gorski.html

http://angrybear.blogspot.com/2009/02/minimum-wage-disinformation.html

http://en.wikipedia.org/wiki/Minimum_Wage

Or, my favorite:

http://economistsview.typepad.com/economistsview/2006/12/an_interview_wi.html#MINWAGE

Where David Card points out that there's always a lot more going on than the textbook model.

Doc Merlin writes:

I think even to that, you will find plenty of economists who say it isn't so. Its a political question nowdays, so those who side with the left will say it doesn't and those who side with the right will say it does. Its a simple as that.

Eric H writes:

David C--

Great links!

Especially Card's interview. I liked this:

"Realistically, of course, the U.S. is never going to enforce a draconian minimum wage, nor is one ever going to be passed. However, our results don't mean that minimum wages in other economies couldn't have some effect."

Bill Woolsey writes:

Tom:

I have taught economics for about 27 years.

Frequently, I bring up this argument that the minmum wage is a good idea because we as a society have decided that it is better for people not to work at all than to work for a low wage.

You (the students) have have decided that, right? We all know this. It is a decision we all make.

The result is dumbfounded stares. They have no idea that the minimum wage could possibly make the least skilled workers unemployable.

The prospect of getting rid of the minimum wage generates visions of wages at near zero levels. We must have a mimium wage or current wages would be at the same level as they were in 1900.

The notion that there would be a continuum of wages for different sorts of workers with progressively fewer people making extremely low wages, just as there are increasing numbers making wages closer to the median and then falling off after that, is something that is beyond their comprehension.

The anti-minimum wage arguments are just as bad. Some argue that increases in mimimum wages result in a proportional increase in prices, so that the real minimum wage remains unchanged. It doesn't do any good to raise the minimum wage.

Apply the law of demand and supply to the issue? Never crosses their minds.

My view is that the elasticity of the demand for unskilled labor is such that a higher minimum wage not only increases the real incomes of those who remain employed, these gains are larger than the losses to those who are made unemployable. Total output and income falls, however, and so real incomes of 95% of the people in society drop, mostly through higher prices for the products of unskilled labor with nominal incomes hardly changed.

Employed unskilled workers get a larger share of a smaller pie, but the size of the piece is bigger. And everyone else ends up with a smaller share of a smaller pie, with the least skilled workers' slice of the pie shrinking to nothing. I find this impact the most troubling.

I realize that having people start work later has impacts for their lifetime earnings so that in the long run, the consequences can be negative for everyone. (More money for the first job that begins a bit later in life, and less money over the lifetime because you retire or die with fewer total years of experience.) I am even aware of paradoxical effects of reduced years in school from a higher minimum wage.

I am also aware of the facist argument of imposing standards so that people have to shape up and live well or else suffer the fate of homeless begging. I think Cassel described that one in the twenties.

And I think free labor markets work very imperfectly, and it is entirely possible that a modest increase in the minimum wage will push wages currently below equilibrium to a point closer to equilibrium. There is a whole range where increases in a minimum wage could expand employment. But I still think the imperfect market process is a better way to respond to labor shortages than increasing a minimum wage.



jeffrey d writes:

Slavery is perfectly compatible with Capitalism.
Slavery is NOT COMPATIBLE with Democracy.

Ryan Vann writes:

"I think even to that, you will find plenty of economists who say it isn't so. Its a political question nowdays, so those who side with the left will say it doesn't and those who side with the right will say it does. Its a simple as that."-Doc Merlin

Unfortunately, that is most likely the case.


"And I think free labor markets work very imperfectly, and it is entirely possible that a modest increase in the minimum wage will push wages currently below equilibrium to a point closer to equilibrium."- Bill Woolsey

Wouldn't it also move wages closer to equilibrium if wages were above equilibrium? Do you think there is more friction to lowering wages, based on a federal mandate, or raising them? If I'm Joe Convenience Store Owner, and have been paying my clerks 10 bucks and hour, and the Feds say I only have to pay them 8, any future hires are probably going to see a wage drop.

I'd probably split the difference, as I can justify the going rate, as it would actually be a whole dollar more than the federal rate, but still a dollar less than what I was paying.

Alan Crowe writes:

Since economics is empirical but non-experimental you need to distinguish between claims about causes and claims about observations.

My view is that sophisticated politicians try to garner political credit by cycling the minimum wage. The technique is to let the minimum wage drift downwards in real terms due to inflation, waiting for the right moment. When the economy starts to boom and the labour markets starts to tighten, raise the minimum wage and claim credit for rises that would have happened anyway.

So I would answer the causal question and the observational question in opposite directions. The minimum wage depresses employment, but when we correlate changes we see rises in the minimum wage correlating with rises in employment.

I am puzzled that empirical evidence doesn't really seem to confirm this prediction. Perhaps politicians are not as shrewd as I imagine, or perhaps leading indicators of employment are far from reliable and it is hard to get the timing right.

I think that your wording does actually cover my point because the sleight of hand that I anticipate only works for changes, not for level. Nevertheless I would prefer to see the question be explicitly about the causal connections that politicians have to work with, rather than about what appearance they might be able to conjure with clever timing.

CJ Smith writes:

@jeffrey d:

And if 51% of the electorate vote to enslave the other 49%?

Doc Merlin writes:

"I am puzzled that empirical evidence doesn't really seem to confirm this prediction. Perhaps politicians are not as shrewd as I imagine, or perhaps leading indicators of employment are far from reliable and it is hard to get the timing right."

Its not that they aren't shrewd. Politicians on the left actually believe they can make people earn more by raising minimum wage. They believe the only reason people are not making more money is that they are being exploited.

Tom West writes:

Bill Woolsey

Employed unskilled workers get a larger share of a smaller pie, but the size of the piece is bigger. And everyone else ends up with a smaller share of a smaller pie, with the least skilled workers' slice of the pie shrinking to nothing. I find this impact the most troubling.

I agree with the your assessment. It's really a matter of how we weigh the benefit to the large group of unskilled laborers vs. the loss of employment to at least a few.

My concern is actually rather more social than economic. Employers seem to value employees based on how much they pay them rather than how much they produce. (I'm certain there's a name for this w.r.t. physical objects, but I can't find it.)

My experience has been that employers that have to pay say $10/hr vs. $6/hr are more likely to treat the employees better, be more considerate for their safety, etc. (It's odd, but it really does seem to be a basic component of human makeup.)

My concern with letting people work for $2/hr is that they tend to be treated as disposable, valueless people. Have the same people do the same work for $10/hr and suddenly they're employees instead of desperate subhumans who deserve whatever happens to them (yes, exaggeration for effect).

As a society, we seem to treat those who cannot work at all much more humanely than those who work for too small amount. (i.e. those on social assistance are treated better than those working for a pittance.)

I've seen this happen enough times that I'm convinced that jobs that are only worth a pittance are better left undone for social stability/cohesion.

However, I do agree that people who can only produce $2/hr worth of value would be better off without minimum wage. It's just not enough of a collective benefit to outweigh the benefit of more people being treated with basic human consideration.

Max writes:

[Comment removed for supplying false email address. Email the webmaster@econlib.org to request restoring your comment privileges. A valid email address is required to post comments on EconLog.--Econlib Ed.]

Steve Roth writes:

How about this:

Yes/No. Can minimum wage laws increase overall utility? [compared to not having them, obviously.]

Short answer. If your answer to the first question was yes, at what level do minimum wage laws begin to yield negative overall utility?

Given all the empirical research suggesting little employment impact at our low levels, and significant benefits for recipients, "minimum wages" is not a yes/no question. It's a matter of degree. And all the good research seems to suggest that we're currently below the utility-maximizing point.

Bonus question: Is there a short-term/long-term utility tradeoff with minimum wage laws at different levels? Does the effect at a given level push in the same direction over two years and over twenty?

Steve Roth writes:

Note on my questions: Not useful for the AEA survey, but perhaps useful for this discussion.

Andrew L Sullivan writes:

I think the question confuses two different concepts by using the word "increase".

Having minimum wage can be accepted as a standard of measurement or rule or regulation. (Technically, it should be a dollar.) However, whether to have a minimum wage or not is a totally different question than the political question: should minimum wage be increased?

Changing the amount of the minimum wage is as stupid as waking up one morning and declaring you are 12 feet tall. The measurement has simply been swapped out for a different measurement. No matter how much they increase minimum wage, it can NOT help the minimum wage worker as by definition, the minimum wage worker will still have the lowest paying job allowed on the market. Instead of helping the 2 percent of people on minimum wage, what increasing the minimum wage does is bring the other 98 percent wage workers closer to the level of minimum wage. When you consider Congress boosted minimum wage over over 40 percent in three years, you can see why the unemployment rate went through the roof.

Most economists ignore the fact of how employers cope with higher minimum wage: by cutting benefits and hours for all employees, regardless if they are on minimum wage or not.

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