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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Caritas in Veritate 25, By the Numbers II

Tuesday, July 27, 2010 \AM\.\Tue\.

In yesterday’s post, we examined the claim, made by Pope Benedict in Caritas in Veritate 25, that globalization has led countries to deregulate their labor markets, which in turn has led to cuts in social spending. It turned out that the Pope’s first claim (that globalization led to deregulation) was consistent with the data, whereas his second claim (deregulation led to cuts in social spending) was not. Countries with freer labor markets tend, on average, to devote a greater percentage of GDP to social spending than do countries where labor markets are highly regulated (and, since countries with freer labor markets tend to be richer as well, the increase is even larger in absolute terms).

In addition to speaking of labor market deregulation, Caritas in Veritate also makes reference to countries adopting “favorable fiscal regimes” as a part of global competition, and suggests that this also has led to a decline in social spending. Evaluating these claims is a bit more difficult than evaluating the Pope’s claims about labor markets, because it is not entirely clear what the Pope has in mind when he speaks of “favorable fiscal regimes.”

One possibility is that the Pope is thinking here primarily about taxes, and that adopting a “favorable fiscal regime” consists in lowering taxes, particularly taxes on business, in order to attract foreign investment.

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Caritas in Veritate 25, By the Numbers

Monday, July 26, 2010 \PM\.\Mon\.

My co-blogger Tim recently highlighted the following statement from Pope Benedict’s latest social encyclical, Caritas in Veritate:

The global market has stimulated first and foremost, on the part of rich countries, a search for areas in which to outsource production at low cost with a view to reducing the prices of many goods, increasing purchasing power and thus accelerating the rate of development in terms of greater availability of consumer goods for the domestic market. Consequently, the market has prompted new forms of competition between States as they seek to attract foreign businesses to set up production centres, by means of a variety of instruments, including favourable fiscal regimes and deregulation of the labour market. These processes have led to a downsizing of social security systems as the price to be paid for seeking greater competitive advantage in the global market, with consequent grave danger for the rights of workers, for fundamental human rights and for the solidarity associated with the traditional forms of the social State. Systems of social security can lose the capacity to carry out their task, both in emerging countries and in those that were among the earliest to develop, as well as in poor countries. Here budgetary policies, with cuts in social spending often made under pressure from international financial institutions, can leave citizens powerless in the face of old and new risks; such powerlessness is increased by the lack of effective protection on the part of workers’ associations.

Now in this passage, the Pope makes a number of factual and causal claims. First, he claims that the global market has led countries to “attempt to attract foreign businesses” by adopting “favourable fiscal regimes and deregulation of the labour market.” Second, the Pope claims that these reforms (i.e. adopting “favourable fiscal regimes and deregulation of the labour market”) have led to “a downsizing of social security systems” and “cuts in social spending.”

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