"Here's the problem with the simplistic argument that minimum wage laws automatically cut jobs. It's based on Economics 101 for commodity markets that says if prices rise, demand falls. But labor markets are not like commodity markets for a number of reasons:"

Somewhat more precisely, the "minimum wages cut jobs" argument rests on the assumption you have a perfectly competitive labor market. A perfectly competitive market, of any kind, requires, among other conditions, that 1) the product being bought and sold is standardized--every unit is identical, and 2) no one in the market has any market power--leverage over the price. Such conditions hardly ever exist in markets for goods, much less in labor markets (my introductory econ students always find it easy to understand that labor is not a standardized product).

There's another issue which even supporters of an increased minimum wage have neglected. The *largest* impact of an increase in the minimum wage ever found was that a 10% increase in the minimum lead to a 3% decrease in employment of affected workers. Those numbers imply a price elasticity of demand for labor of 0.3--very inelastic demand.

One of the basic lessons about demand elasticity is that when demand for something is inelastic, than an increase in price leads to an increase in total revenue. In this case, that would mean that, even if increasing the minimum wage reduced total employment, the total *income* of affected workers would increase.

Only if you had a negative impact on employment over three times greater than the largest ever found in empirical research, would minimum wage workers truly be "worse off" due to a minimum wage increase.

This means that the pseudo-compassionate arguments of minimum wage opponents are, in fact, invalid.

Mark- with your last point you are anticipating my "So what if employment drops" post :)

Well, down the rabbit hole we go... If true, all the government needs to do is keep raising the minimum wage till there is full employment. All those recessions had a simple cure. The reason it is not true is because all the minimum wage law does is restrict choice. The employer has less choice in mixing his capital and labor, the employee has less choice in what price he can offer his services. And where I come from people try to make the best choice. If their best choice is taken away, they are left with their second best choice. For the employer that means a more expensive product or less profit. For a minimum wage worker, it means a lot of free time on their hands.

Yes, Greg-- people have heard the Econ 101 lecture. Now, how about responding to the Card & Krueger empirical research, and the fact that the minimum wage was $8 per hour in real terms back in 1968, yet unemployment was lower then than now?

OK, you're saying that there isn't a simple linear decreasing or even monotonically decreasing effect on employment as the minimum wage rises. But clearly the curve has to have negative slope somewhere, right? If we raise the m.w. to $100/hr or $1000/hr we don't expect any McDonald's to have human beings standing over the fry machine. It will have to be a robot or the store will have to close.

Since we know this curve to be negative somewhere, we can ask where this occurs. For some of the very reasons you mention above, I'd expect this to vary by specific type of job, by industry, etc. For this reason I think that a flat minimum wage is, in general, a bad idea, and I also think that raising it blindly on the assumption that it will probably do more good than harm is also a bad one.

The effects of a bad minimum wage on certain industries can disproportionately effect the rest of the economy. A good example of this is migrant vegetable and fruit picking. The effect of an economically unfeasible minimum wage on this industry has been a widespread flouting of immigration law. If the law were to be enforced strictly on this industry, it would simple move outside the jurisdiction of the law, to another country.

Which leads me to my final point. The notion of a minimum wage is fundamentally an artifical minimum economic value of a certain amount of labor. We don't set this minimum value by the nature of the labor, e.g. a minimum value for the time of a medical doctor, but for all people of all backgrounds in all fields of endeavor. On its face this doesn't make much sense, but to proceed in the logical direction moves us to an almost planned economy. A fundamental notion in the arguments for wage controls of this kind is the un-market-like relationship between an employer who controls many jobs and a single employee. But this same disparity also means that if the employer is subject to economically unfeasible or even strongly undesirable labor rules, they may move their source of production to another jurisdiction where they are not so regulated. To prevent this requires other macroeconomic solutions such as tariffs, which in turn have their own undesirable effects. I suggest that the small benefits of an absolute minimum wage are not worth the costs they entail, and the larger benefits available to a more structured plan require even less desirable costs.

1. "Workers can shift into different jobs, so a fall in demand for one kind of work can still lead to the workers getting jobs in a new venue."

If you raise the price of labor, and less of it is demanded in one venue, does that automatically create demand in another venue? If a person is laid off from a minimum wage job flipping burgers because the wage goes too high, does the act of raising the wage rate create more demand for, say, call-center reps?

3. "To assume lost employment, you have to assume an overall drop in consumption across the whole population or the substitution of capital for labor costs in that particular industry -- which in turn drives new employment in other sectors to produce the needed capital goods."

If burger-flippers are too costly, a machine to flip burgers that is less expensive can be produced - capital substitutes labor. This drives employment in a different sector, a very skilled, and likely non-minimum-wage sector. The result is that capital-producing skilled laborers get MORE money, and un-skilled laborers lose everything. This may encourage un-skilled laborers to develop skills, but that would be the same as just dropping the minimum wage to 0 - eliminating it. If labor prices could truly reflect the real value of a particular job, that could also motivate laborers into developing skills.

4. You're again taking everything away from low-skilled and un-skilled workers and giving the gains to more skilled.

5. Keynesian principles demonstrate that demand creates supply. But if labor prices are artificially raised, only that labor that is worth more than artificial price will be sustainable. Supply and demand affect each other, and a higher labor price decreases supply, except in already highly valued (high-priced) production. But the low and un-skilled laborers that lose their income cannot now afford these high-priced goods, or any goods, technically, so demand for these goods drops, causing price drops and supply drops - more unemployment.

The only way for laborers, employers, and consumers to establish the best, non-arbitrary, efficient labor price is to abolish all wage laws. Price signals can then motivate and coordinate people's actions in a completely un-biased way. Laborers will be motivated to get skills, employers will be motivated to seek out the most efficient means of production, whether labor or capital, and consumers will see the true cost of goods and services.

If you want a deeper argument, I'm sure you could find some research from a contrary perspective to Card & Kreuger if you look for it. But you probably don't want to look for it, because you're happy to find something that credits your view, and rather than persue a full and knowledgable approach to find a solution, you'd rather rest comfortably in your own bias, just as I do.

If that's the case, you shouldn't be making these kinds of decisions, and you shouldn't be suggesting policy that you haven't fully researched. Basically, you don't know what you're talking about, and neither do I, so we should both shut up.

The assertion that minimum wage helps low-income employees because on the whole, a 10% raise in wage results in only a 3% drop in employment, is specious. It is true that for the wage-earners that keep their jobs, they are 10% better off, but 3% are 100% worse off. By my math, that's pretty steep if you're one of the 3%. The assertion made by Libertarians (comme moi) is that minimum wage decreases employment. This is true. Raising the minimum wage does not increase employment. It cannot. Your assertion is only that the degree to which it lowers employment makes it worthwhile.

The money that flows into low-income workers' pockets due to a raise does not increase capital in the economy. That is merely capital that now does not go to business owners and shareholders. It is not created, but rather redistributed. Redistribution of wealth is the beginning of, as has been pointed out, a planned economy.

Comments welcome...

Don Smith
smith4oregon.com

The assertion that minimum wage helps low-income employees because on the whole, a 10% raise in wage results in only a 3% drop in employment, is specious. It is true that for the wage-earners that keep their jobs, they are 10% better off, but 3% are 100% worse off. By my math, that's pretty steep if you're one of the 3%. The assertion made by Libertarians (comme moi) is that minimum wage decreases employment. This is true. Raising the minimum wage does not increase employment. It cannot. Your assertion is only that the degree to which it lowers employment makes it worthwhile.

The money that flows into low-income workers' pockets due to a raise does not increase capital in the economy. That is merely capital that now does not go to business owners and shareholders. It is not created, but rather redistributed. Redistribution of wealth is the beginning of, as has been pointed out, a planned economy.

Comments welcome...

Don Smith
smith4oregon.com

Well- your math is a bit off, since you have to assume (1) that the supposed 3% laid-off don't find a job somewhere else, an option always ignored by conservative analysts of the issue, and (2) that the 3% laid-off are not 100% worse off, since they qualify for a number of benefits, such as unemployment insurance, food stamps, medical care, etc. that helps them out.

Of course, research shows that no 3% is even laid off. In fact, there's no real empirical evidence that minimum wage laws lead to any additional unemployment.