Academic journal article Economics, Management and Financial Markets

Debate over the Minimum Wage Law

Academic journal article Economics, Management and Financial Markets

Debate over the Minimum Wage Law

Article excerpt

ABSTRACT. This is a debate between two economists regarding the effects of minimum wage legislation. One of these economists is a professor at the Wharton School; his son is a student at Loyola University New Orleans. The other is a professor at the latter institution, and instructor of the former's son. This interchange took place during the spring semester, 2012.

JEL Classification: J18, J38, J64

Keywords: minimum wage, unemployment, economic methodology

This debate1 consists of a series of letters between Peter Cappelli and Walter Block. The former is the father of Bo Cappelli, a student at Loyola University New Orleans; the latter is Bo's instructor in an introductory course in microeconomics.

Here is a note of Walter Block's to his students about this debate:

Dear Students,

None of this is required reading. Were Bo's dad anything other than a fellow professional economist, this conversation would not be taking place. My syllabus already gives you enough required reading. None of this will be on any exam of mine. However, if you are interested in the subject enough to enjoy two professional economists squabbling with one another, please do read this debate over the minimum wage law. I am sure that Prof. Cappelli will agree with me that it is rare for intro micro students to be able to witness this sort ofthing. I'm sure that at least some of you will greatly appreciate this treat.

Dear Peter,

In all of my microeconomics classes I demonstrate through supply and demand what countless others have done before me: if a minimum wage law stipulates a rate of pay above equilibrium, it will cause unemployment for unskilled workers whose (marginal revenue) productivity is below that level.

I'm curious: do you agree with Sowell2 on the minimum wage law? I certainly do.

Best regards,

Walter

Dear Walter,

First, I'd like to remind your students that microeconomics is a very important subject because it explains a great deal about how the world works - how individuals make decisions and how much of the economy works. Understanding demand and supply functions and what they mean, elasticities, marginal utility analysis in particular tell us a lot about efficient behavior. Equilibrium, market structures, etc. are really important for understanding the economy and policy.

I've been around the topic of minimum wages since 1974. There have been few new arguments since then but more evidence. The view of opponents like Thomas Sowell is that minimum wages should price low marginal ability workers out of jobs. The advocates argue that the benefits in terms of higher incomes for those who have jobs are worth the cost of higher unemployment among low value workers. These were largely value judgments.

Since then, there have been a great deal of studies about what the actual effect of minimum wages is on employment. These studies are increasingly sophisticated. Some studies showing no effects on employment when the minimum wage rises, some showing relatively small effects with the differences varying with the dataseis being used. My read of the studies is that the range in their findings is really quite small, and that they show only modest effects on job losses. This is an empirical judgment.

That is perhaps not surprising given that we increasingly find that labor markets do not work the way simple descriptions of efficient markets operate because they involve human decisions about human beings. For example, the simple market view is that discrimination should not exist because profitmaximizing employers should hire workers who are discriminated against as they are cheaper, then driving out of business those who do discriminate. This did not happen.

Most economists who support the idea of a minimum wage see it as a less than ideal way to help the poor and prefer programs like the earned income tax credit, which subsidies the wages of low-income workers. …

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