Alan Krueger, Alex Tabarrok, Automation, David Card, Denmark Minimum Wage, Diana Furchtgott-Roth, Don Boudreaux, Exclusionary Tactic, Living Wage, Marginal Revolution, Minimum Wage, Seattle Minimum Wage
A minimum wage study from Denmark reinforces the findings of the Seattle study released this week by economists at the University of Washington. Both studies conclude that increases in the minimum wage have negative effects on low-earners, at least for large increases in wage floors of the type advocated by “living wage” proponents. Alex Tabarrok provided commentary of both studies this week on the Marginal Revolution blog.
The Seattle study found that both employment and hours worked declined substantially among low-wage workers following the city’s minimum wage hikes. This became particularly clear after the most recent increase from $11 to $13 per hour. The average low-wage worker in Seattle lost $125 per month, according to the findings. The study has generally been praised for its detailed data and careful methodology.
The Danish study took advantage of the fact that the minimum wage rises by 40% on a worker’s 18th birthday. The chart above pretty much boils down the results. Employment drops by a third at age 18. Even worse, Tabarrok notes that after one year, 40% of workers who lose their jobs at age 18 are still unemployed, while 75% of those who keep their jobs at 18 are still employed. The fate of these two groups is likely driven by a gap in talent and skills, and that gap can only expand as the least-skilled are idled.
The minimum wage is a misguided policy that hurts those who can least afford it: low-wage, low-skilled workers. Firms forced to adjust to the higher mandated wage are worse off as well, not to mention their customers, who are likely to face higher prices and degraded service levels. Even those who remain employed at the minimum wage might suffer under less generous job perks and working conditions. Today, large increases in the wage floor can be expected to bring premature automation of jobs.
In the real world, workers of low skill vary tremendously in their actual ability, prior training and discipline to perform in a structured environment. Many of these individuals simply cannot add value over and above the legal wage. Some are simply incapable of understanding the demands of arriving on time and delivering effort over the course of a work day. Hiring firms cannot easily discern these differences up-front from social cues. They might try, however, which could lead to decisions that are unfair to some individuals. An even higher minimum wage makes these decisions all the more difficult and risky, and forecloses opportunities to a broader swath of low-skilled workers, consigning them to dependency on family or the state.
The minimum wage has always had appeal as an exclusionary tactic by higher-paid union workers. Cowed by its ostensible first-order effects on worker incomes, the left latched onto it as a fundamentally just policy. The negative second-order effects are predictable however. The economic evidence has been piling up, while methodological flaws in an earlier, prominent study finding the opposite in the 1990s have been exposed. As a policy, the minimum wage is unjust in its effects on the incomes of low-skilled workers and on their ability to gain valuable work experience, and on businesses attempting to deliver value to their customers.
Note: I believe Don Boudreaux should be credited with the phrase used in the title of this post, which I’m sure I’ve quoted before. For more background on minimum wage effects, see these earlier posts on Sacred Cow Chips. There are 20 posts with that tag, and some are more focused on the minimum wage than others, so keep scrolling!
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