The Economics and Ethics of Minimum Wage Legislation

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Abstract Recent empirical studies have led the economics profession to question the proposition that minimum wage legislation necessarily leads to greater unemployment. This paper extends the analysis of these studies by providing several theoretical reasons why these empirical results may reflect a larger truth. Moreover, it addresses a relatively neglected aspect of the minimum wage debate - its ethical dimensions. Specifically, do the elementary principles of economic justice mandate that employees who "play by the rules," should earn a "living wage"? This paper argues that the minimum wage is a successful economic policy that is consistent with economic justice.

Keywords: minimum wage, economic policy, subsistence, women

The economics profession has begun to reexamine its position concerning the relationship between a legislated minimum wage and the level of employment. Only a few years ago, it was generally thought that a minimum wage would result in increased levels of unemployment and diminished opportunities for the acquisition of job skills among relatively low-wage workers (Katz and Rosen 1991: 378-380, 406-407; Stigler 1946). Typically, the economics literature presented minimum wage legislation as an example of a policy that was subject to "the perversity thesis," in which a well-intentioned social policy inadvertently harms the very group that it was designed to assist (Hirschman 1991: chapter 2).

Recently, a number of authors, including several leading figures from within the mainstream of the economics profession, have lent their authority to a revisionist position. Their conclusion, based upon extensive empirical studies, is that the minimum wage has no discernible effect on the level of employment, and may even be correlated with increased levels of employment (Card and Krueger 1995; Schmitt 1996; Spriggs and Schmitt 1996).

This paper extends the analysis of these studies by providing theoretical reasons why these empirical results may not be anomalous. Moreover, it addresses a relatively neglected aspect of the minimum wage debate -- its ethical dimensions. Specifically do the elementary principles of economic justice mandate that employees who "play by the rules," should earn a "living wage"? This paper argues that the minimum wage is a successful economic policy that is consistent with economic justice.

THE ECONOMICS OF THE MINIMUM WAGE

The Minimum Wage, the Marginal Propensity to Consume, and the Level of Employment

To understand the economics of the minimum wage, we begin with the observation that the labor market cannot be treated as simply another market, subject to the textbook theory of "supply and demand." The reason is that the labor market is so much larger and all-encompassing than the market for carrots or cocoa futures. Even if we accept the argument that low-wage labor markets are somewhat isolated from the national labor market, we are still confronted by the fact that changing the level of wages in such a large market has macroeconomic implications.

The reason is that wages make up a large component of American incomes, and we consume out of our incomes. For example, Robert Pollin and Stephanie Luce have calculated that if the share of the total social product going to those who earn the minimum wage were to be the same as it was in 1969, the minimum wage, as of 1997, would have to be increased to around $11.20. For an employee to have the same purchasing power as a minimum wage worker in 1969, the 1997 minimum wage would have to be set at around $7.40 (Pollin and Luce 1998: 39-40). [1] Such a substantial increase in the minimum wage would affect the earnings, and spending capacity, of around 30 percent of all American workers.

Specifically, increasing the minimum wage would induce a decline in the level of consumption out of profits, and an increase in the level of consumption out of wage incomes. Michal Kalecki (1971: chapter 1), Nicholas Kaldor (1956), and Joan Robinson (1949: chapter 5) have long argued that the rate of spending out of wages is higher than spending out of profits, so it would follow that a redistribution from profits to wages would induce an increase in the marginal propensity to consume for society as a whole. …