Both the proponents and the opponents of a government-imposed minimum wage tend to use data in an effort to make their respective cases. In particular, if they are in favour of a higher minimum wage they cite examples of increases in the minimum wage being followed by stable or lower unemployment to supposedly refute the argument that higher unemployment would result from a government-enforced wage hike for the lowest earners, while those on the opposite side of the fence cite examples where a higher rate of unemployment followed a minimum-wage increase. However, whether arguing for or against the minimum wage or a higher minimum wage, such arguments are misguided. The reality is that there are so many influences on the general level of employment that it isn’t possible to separate-out the effects of the minimum wage.
As is usually the case with questions regarding the effects of a policy on the overall economy, questions about the consequences of minimum wage legislation cannot be properly answered by referring to historical data. For one thing and as noted above, it will never be possible to identify what changes in the employment situation stemmed from the minimum-wage change and what changes were due to the myriad other influences. To put it another way, although economists like to use the term “ceteris paribus” (meaning: with all else being the same) in their writings, in the real world all else is never the same. In the real world there will always be countless differences between the same economy during different time periods and between different economies during the same time period. Furthermore, unlike the physical sciences it is not possible to do experiments in economics in which a single input is adjusted and the resultant change in the output observed/measured.
In economics, the overall effect of a policy must be deduced from first principles. In the case of the minimum wage, the principle of relevance is the law of supply and demand. To be more specific, the relevant principle is that, “ceteris paribus”, the quantity of a good demanded will fall as its price rises. The fact that all else is never the same in the real world means that it will never be possible to separately measure the effect on employment of increasing the minimum wage, but it is axiomatic that artificially raising the price of anything, including the price of labour, will result in the demand for that thing being lower than would otherwise be the case. That is, it is axiomatic that fixing the minimum price of labour significantly above where it would be in a free market will result in higher unemployment. No data are required.
As an aside, those in favour of hiking the minimum wage almost always word their arguments to make it seem as if the legislation only imposes restrictions on employers, but it’s important to appreciate that the legislation also restricts job-seekers. There are undoubtedly people who would gladly accept payment below the government-set “minimum wage” in order to gain the skills and experience that would make them more valuable to employers in the future, but minimum-wage laws prevent these people from offering their services for less than the limit set by the government. Do-gooders would prefer that these people were dependents of the State rather than be productive and get paid less than some arbitrary lower limit.
In conclusion, advocating for a higher government-mandated minimum wage and including as part of your case the assertion that employment will not be adversely affected is equivalent to holding up a sign that reads: “I am clueless about the most basic principle of economics”.
About Steven Saville
Print This Post