The Minimum Wage

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"The minimum wage is something that F.D.R. put in place a long time ago during the Great Depression. I don't think it worked then. It didn't solve any problems then and it hasn't solved any problems in 50 years."

-- John Raese

For many years it has been a matter of conventional wisdom among economists that the minimum wage causes fewer jobs to exist than would be the case without it. This is simply a matter of price theory, taught in every economics textbook, requiring no elaborate analysis to justify. Were this not the case, there would be no logical reason why the minimum wage could not be set at $10, $100, or $1 million per hour.

Historically, defenders of the minimum wage have not disputed the dis-employment effects of the minimum wage, but argued that on balance the working poor were better off. In other words, the higher incomes of those with jobs offset the lower incomes of those without jobs, as a result of the minimum wage l "levitan".

Now, President Obama is advancing the novel economic theory that modest increases in the minimum wage will have no impact whatsoever on employment. This proposition is based entirely on the work of three economists: David Card and Alan Krueger of Princeton, and Lawrence Katz of Harvard. Their studies of increases in the minimum wage in California, Texas and New Jersey apparently found no loss of jobs among fast food restaurants that were surveyed before and after the increase [ l "card-92b", l "krueger", and l "katz".

While it is not yet clear why Card, Katz and Krueger got the results that they did, it is clear that their findings are directly contrary to virtually every empirical study ever done on the minimum wage. These studies were exhaustively surveyed by the Minimum Wage Study Commission, which concluded that a 10% increase in the minimum wage reduced teenage employment by 1% to 3%.

The following survey of the academic research on the minimum wage is designed to give nonspecialists a sense of just how isolated the Card, Krueger and Katz studies are. It will also indicate that the minimum wage has wide-ranging negative effects that go beyond unemployment. For example, higher minimum wages encourage employers to cut back on training, thus depriving low wage workers of an important means of long-term advancement, in return for a small increase in current income. For many workers this is a very ...

... middle of paper ...

...g (1996), " `Who Gets What' from Minimum Wage Hikes," Industrial and Labor Relations Review 49 (April): 547-52.

· ------, and T. A. Finegan (1989), "The Minimum Wage and the Poor: The End of a Relationship," Journal of Policy Analysis and Management 8 (Winter): 53-71.

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· Card, D., and A. Krueger (1995), Myth and Measurement (Princeton, N.J.: Princeton University Press).

· Deere, D., K. M. Murphy and F. Welch (1995), "Employment and the 1990-1991 Minimum Wage Hike," American Economic Review Papers and Proceedings 85 (May): 232-37.

· Gramlich, E. (1976), "Impact of Minimum Wages on Other Wages, Employment, and Family Incomes," Brookings Papers on Economic Activity 2: 409-51.

· Lang, K. (1994), "The Effect of Minimum Wage Laws on the Distribution of Employment: Theory and Evidence," Working Paper, Boston University.

· Neumark, D., and W. Wascher (1995), "The Effects of Minimum Wages on Teenage Employment and Enrollment: Evidence from Matched CPS Surveys," NBER Working Paper No. 5092, April.

· Smith, R., and B. Vavrichek (1992), "The Wage Mobility of Minimum Wage Workers," Industrial and Labor Relations Review 46 (October): 82-88.

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