Monday, July 02, 2007

Minimum wage, redux

I try really hard to keep an open mind, so when I ran across a reference to this recent Economic Policy Institute paper on the minimum wage, I read through it.

It seems logical to me that raising the minimum wage should either increase unemployment, or increase the number of people working for below minimum wage in the underground economy. Why? Well, do the thought experiment at an extreme-- raise the minimum wage to $30 an hour. What would happen?

McDonalds would get replaced by McVendo (a hamburger from a vending-machine place). WalMart would get replaced by a big warehouse store where you look up what you want in a catalog and then tell a robot to go fetch it for you.

Only the most expensive restaurants would be able to afford to pay waiters and waitresses; the rest of us would eat out in cafeterias.

And you'd illegally pay the kid down the street less than minimum wage to mow your lawn (oh, wait, you're probably doing that now...).

So: I was VERY surprised to see the above-mentioned paper, where they found no increase in unemployment in states that raised their minimum wage above the federal minimum (when compared to states that did NOT raise their minimum wage). Then again, I'm nowhere near qualified to figure out whether or not their statistical methods are valid (they sure sound impressive...). And, as far as I can tell, the paper wasn't published in a peer-reviewed economics journal (BIG red flag there).

But assuming that they got it right-- money doesn't magically appear out of thin air1, so when the minimum wage increases what DOES happen?

Possible clues from the paper:
The minimum wage states... have fewer native-born citizens and more foreign-born citizens and non-citizens.

I don't think they looked at whether increasing the minimum wage INCREASED the number of non-citizens. If it did, that might explain it-- more illegal workers taking jobs at below-minimum-wage rates.

... the minimum wage is associated with higher wages for teenagers but an effect is not discernable for adults.

The number of people making minimum wage is pretty darn small. Maybe employers cut back on raises a little bit for everybody making above minimum wage so they could pay the minimum-wage-teenagers a little more. Good if you're a teenager, I suppose.

I also wonder what they'd find if they looked at state's population growth. Did the states that increased the minimum wage lose low-wage workers to other states?
1Well, money is created out of thin air by the Federal Reserve, but that should affect all states equally.

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