Minimum Wage, Maximum Folly

By Williams, Walter E. | Freeman, March 2007 | Go to article overview

Minimum Wage, Maximum Folly


Williams, Walter E., Freeman


The big Associated Press story for last October 11 was that "More than 650 economists, including five winners of the Nobel Prize for economics, called Wednesday for an increase in the minimum wage, saying the value of the last increase, in 1997, has been 'fully eroded.' " Among these economists were Nobel laureates such as Kenneth Arrow of Stanford University, Lawrence Klein of the University of Pennsylvania, Robert Solow of the Massachusetts Institute of Technology, Joseph Stiglitz of Columbia University, and Clive Granger of the University of California, San Diego, who said that the real value of today's federal minimum wage is less than it has been at any time since 1951.

Their statement went on to say, "We believe that a modest increase in the minimum wage would improve the well-being of low-wage workers and would not have the adverse effects that critics have claimed." Moreover they asserted, "The minimum wage is also an important tool in fighting poverty." These and other assertions amount to what might be seen as examples of economic malpractice.

While there is a debate over the magnitude of the effects, the weight of research by academic scholars points to the conclusion that unemployment for some population groups is directly related to legal minimum wages. The unemployment effects of the minimum-wage law are felt disproportionately by nonwhites. A 1976 survey by the American Economic Association found that 90 percent of its members agreed that increasing the minimum wage raises unemployment among young and unskilled workers. It was followed by another survey, in 1990, which found that 80 percent of economists agreed with the statement that increases in the minimum wage cause unemployment among the youth and low-skilled. Furthermore, whenever one wants to find a broad consensus in almost any science, one should investigate what is said in its introductory and intermediate college textbooks. By this standard, in economics there is broad agreement that the minimum wage causes unemployment among low-skilled workers.

The reasoning for this unemployment effect is quite simple. If Congress got its way, the current minimum wage is $5.85 an hour. The hourly wage is not the only cost of hiring a worker. There are also legally mandated fringe benefits such as employer payments for Social Security, Medicare, unemployment compensation, and worker-compensation programs at federal and state levels. These mandated benefits may run as high as 30 percent of the hourly wage. This makes the minimum hourly cost borne by the employer close to $8 an hour. Put oneself in the place of an employer and ask: Does it make sense for me to hire a worker who is so unfortunate as to have skills enabling him to produce $4 worth of value per hour when he is going to cost me $8 an hour? Most employers would see doing so a losing economic proposition and not hire such a worker. Thus the minimum wage discriminates against the employment of the least-skilled workers. In our society, the least-skilled workers tend to be teenagers, particularly black teenagers.

I am embarrassed that so many members of my profession are willing to argue that the price of something does not affect the quantity taken of it. To use the jargon of our profession, the implication of their argument is that the demand curve for low-skilled labor has zero elasticity. I propose a test. Ask one of the 650 economists for a yes or no answer to the question of whether the demand curve for low-skilled labor has zero elasticity, or for that matter whether any good or service has a zeroelastic demand curve. I am hoping he will say no. But if no is the answer, ask how it can be said that increases in the minimum wage have no effect. He might respond that modest increases in the minimum wage would produce little or no unemployment effect. …

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