Minimum Wage and Unemployment

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I was surprised to read this assertion about the minimum wage by labor analyst Harry Holzer in the Washington Post today:

“The biggest concern among economists is that imposing pay increases on employers will reduce the hiring of low-wage workers and raise unemployment. But in four decades of research by economists, this appears to be a small or nonexistent effect.”

I was even more surprised that the online version of Holzer’s oped linked to an NBER study by Neumark and Wascher that concluded roughly the opposite. You can judge for yourself: here is the abstract from the Neumark-Wascher study linked by Holzer in support of his “small or nonexistent” claim:

“We review the burgeoning literature on the employment effects of minimum wages - in the United States and other countries - that was spurred by the new minimum wage research beginning in the early 1990s. Our review indicates that there is a wide range of existing estimates and, accordingly, a lack of consensus about the overall effects on low-wage employment of an increase in the minimum wage. However, the oft-stated assertion that recent research fails to support the traditional view that the minimum wage reduces the employment of low-wage workers is clearly incorrect. A sizable majority of the studies surveyed in this monograph give a relatively consistent (although not always statistically significant) indication of negative employment effects of minimum wages. In addition, among the papers we view as providing the most credible evidence, almost all point to negative employment effects, both for the United States as well as for many other countries. Two other important conclusions emerge from our review. First, we see very few - if any - studies that provide convincing evidence of positive employment effects of minimum wages, especially from those studies that focus on the broader groups (rather than a narrow industry) for which the competitive model predicts disemployment effects. Second, the studies that focus on the least-skilled groups provide relatively overwhelming evidence of stronger disemployment effects for these groups.”

Reducing employment is only one of the negative effects associated with the minimum wage. In this study, Mark Wilson discusses some of the other harms that may occur depending on the situation in particular markets.

Unfortunately, too many policymakers believe in the free lunch theory of government intervention. The reality is that unless a clear market failure is occurring, when the government shoves its way into markets and destroys voluntary exchanges, it invariably causes more harm than good.      

As with many things, Milton Friedman said it best: “The minimum wage law is most properly described as a law saying employers must discriminate against people who have low skills.”

For more on minimum wage economics, see this Downsizing Government essay.