Minimum Wage Laws Cause Unemployment

Wednesday, August 4, 2010 \PM\.\Wed\.

The traditional economic take on the minimum wage is that it causes unemployment. If the law says that an employer must either pay a man $7 an hour or nothing, and the man is only worth $5 an hour to the employer, then he will pay him nothing, and the man may go jobless. Many people are skeptical of this line of reasoning. After all, the U.S. recent raised the minimum wage from $5.25 an hour to $7.15 an hour, and it’s not like unemployment is terribly high right now.

Okay, bad example. The truth is that while the theoretical case against the minimum wage is sound, it can be hard to test the theory empirically by looking at the U.S. because minimum wages here tend to be low enough as to only apply to a small portion of the population (around 3%). Given that the minimum wage applies to so few workers – and the fact that market wage for even those workers is probably not far off the legal minimum – its not surprising that whatever effect minimum wage laws have on unemployment tends to get obscured by larger trends in the economy.

The picture is different if we take a worldwide perspective rather than confining ourselves to looking at the U.S.

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