Whether or not minimum wages (and increases to them) affect employment is reasonably controversial. The question is also highly topical given Sue Bradford's push to scrap the minimum youth rate. The following is from this week's Featherston and Molesworth and worth a read.
Minimum wage and unemployment
Nobel laureate in economics and author of the best-selling economics text in hiostory Paul Samuelson once reputedly commented, “When the economic theorist turns to the general problem of wage determination and labour economics, his voice becomes muted and his speech halting. If he is honest with himself, he must confess to a tremendous amount of uncertainty and self-doubt concerning even the most basic and elementary parts of the subject.”
No such halting speech or uncertainty from the Auckland ‘University’ of Technology, which announced Maori would be most adversely affected by a rise in the minimum wage. The claim is based on a study by economics lecturer Gail Pacheco.
“There are high numbers of Maori and Pacific Island people on minimum wage. Together they account for more than a fifth of minimum and sub-minimum wage workers, therefore they’ll attract more negative impact if the wage rise drives employers to reassess their options,” she argued.
“My study found for Maori who find the minimum wage binding, a ten percent rise in the real minimum wage would see a 15.8 percentage point fall in employment propensity, a drop of 13.5 hours usually worked each week, a 5.7 percentage point increase in unemployment propensity and a 10.9 percentage point increase in inactivity, that is, not working or studying.”
These are dramatic findings: A substantial fall in numbers who have jobs and a staggering one third drop in average hours worked if the minimum wage increases by around a dollar.
The study is all the more dramatic because its certainty conflicts with the weight of international academic evidence on the topic. A 1998 International Labour Organisation study (Minimum Wages and Youth Unemployment, ILO Employment and Training Papers) found the relationship between minimum wages and the employment of youth can’t be usefully considered in isolation from other influences on the labour market - elasticity of labour supply, wages and demand for labour along with “reservation wages” (that is, the availability of welfare).
The ILO noted the key question is productivity.
Obviously, at some level a minimum wage would cause unemployment; and if there were no minimum wage and no welfare payments, there might be no unemployment because anyone could find employment for a dollar a day. But cartoonish examples do not tell us much about what happens when the minimum wage is a modest fraction of the average wage and it increases mildly.
Increases in the minimum wage entice some low skilled workers to join the workforce. They also increase purchasing power (by consumers who are most likely to spend their entire income) and therefore stimulate economic activity. It’s also clear that low value jobs can be destroyed (it’s hard to get your shoes shined in countries with a realistic minimum wage).
The AUT study goes further in attributing the employment effects not just to youth, but to Maori.
Claims a higher minimum wage affects racial groups differently were investigated and rejected in a major 1983 study published in the peer reviewed Journal of Human Resources.
“Minimum wage effects differ very little by sex, and there is no strong evidence that the effects vary by race,” it found. [Time-Series Evidence of the Effect of the Minimum Wage on Youth Employment and Unemployment; Brown, Gilroy & Kohen, Journal of Human Resources, Vol. 18, No. 1 (Winter, 1983) , pp. 3-31.] That study, found a ten percent increase in the US minimum wage would reduce teenage employment by about 1 percent. But it also found the unemployment effects would be negligible because low-skilled workers would withdraw from the labour force.
A 2003 survey reports only 46 percent of academic economists in the US agree with the statement, “a minimum wage increases unemployment among young and unskilled workers”.
Another 28 percent partly agreed and 27 percent disagreed.
M&F WEEKEND UPDATE 26 MAY 2006
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