Wednesday, September 20, 2006

Minimum wage debate

As we discussed last night, standard economic theory says that setting a price floor (minimum wage) above the equilibrium wage will cause an increase in quantity supplied (people looking for jobs) and a decrease in the quantity demanded (amount of jobs available. However, the impact of this is hotly debated. To summarize the debate let me provide the following links.

Pro increasing minimum wage:

Against the minimum wage:

My opinion: I agree with Professor Mankiw here. The study cited in support of the minimum wage was done comparing food industry employment between New Jersey (which increased the minimum wage) and Pennsylvania (which did not). They actually found the employment went up in New Jersey. As an explanation they offered a complicated model arguing that normal supply and demand was not operating at such a low wage.

Subsequent research has amended this study somewhat and I believe that the consensus is that no adverse unemployment was wage increases the higher you establish the wage.

However, it is hard to use this study in support of any major hikes in the minimum wage, especially when the program is poorly targeted towards helping the working poor. The alternative program, the EITC, is more effective at doing that. The extent that the minimum wage should be hiked can really only be supported if the credit induces an increase in supply and forces the wage down in response. But the evidence for this so far is small and as you will learn or have learned wages tend to be "sticky" downwards.

Anyway that is my two cents.

1 comment:

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