Okay, maybe that was a cheap shot at a president who is an easy target these days. He didn’t quite say that everybody could keep their jobs if the minimum wage was increased, but he was in error when he stated that there is no strong evidence that minimum wages cause unemployment among unskilled workers.
The controversy over adverse effects of minimum wages center on two things: 1) Where the minimum wage is relative to the market clearing wage, and 2) Whether we are talking short-term or long-term effects.
I always enjoyed asking my students why McDonalds would recruit new employees at $7.00 per hour when the minimum wage was only $5.15. This would usually stop them in their tracks. Was McDonalds just being nice? Well, there may be a lot of nice people at McDonalds but they weren’t paying 36% more than the legal minimum to be altruistic. McDonalds was paying more because they have to compete for workers with Wendy’s, Burger King, Pizza Hut, and a zillion other establishments and the competition had bid up the market wage well past the $5.15 minimum.
So, if burger flippers (as a former burger flipper, I use this term with great affection) were already making more than the minimum, why bother raising it if you are only going to increase it to what burger flippers are making (or will soon be making) anyway? This is where economics gives way to politics. Raising the minimum wage in this instance was merely a symbolic gesture from politicians wanting to take credit for increasing wages with no (or little) downside risk. Again, if all you are doing is raising the minimum wage to the market wage, what’s the point? If they had any guts -- and if politicians really believed that simply raising the minimum wage would help unskilled workers increase their standards of living – wouldn’t they raise it to $20 or $100? I suspect that even the most economically illiterate politician knows that a minimum wage that much higher than the market clearing level is going to cause problems.
In Europe, politicians have not been so timid, however. But if you learn anything in economics it is that because we live in a world of scarce resources, there are always tradeoffs and opportunity costs. The tradeoff here is higher unemployment, and in places like France, Spain, and Belgium, unemployment is typically much higher than it is in the U.S. and high minimum wages are cited as a contributing factor.
As for long-term versus short-term effects, the market for unskilled labor tends to be relatively supply and demand inelastic in the short-term. This means that if even if the minimum wage is placed above the market rate, there won’t be much of an impact on employment. However, over time, elasticity increases as employers figure ways to respond to the higher labor costs which causes the quantity of labor demanded to decrease. Also, over time, some who were otherwise engaged at the lower wages (students, homemakers) will alter their schedules and enter the job market at the higher wages. This will increase the quantity of labor supplied.
Lower quantity demanded + higher quantity supplied = greater unemployment.
Bottom line, we would expect studies where minimum wage increases remained at or below equilibrium, or only measure short-term effects, to conclude that minimum wage has no significant impact on employment. Similarly, we would expect studies where minimum wage is increased above the equilibrium and cover longer periods to conclude that there are adverse effects. Of course, a good politician will only recognize the studies that support his or her ideology, hence President Obama’s statement that there is no evidence that the minimum wage causes unemployment (See MIT Press https://mitpress.mit.edu/books/minimum-wages and NBER http://www.nber.org/papers/w18681.pdf for evidence to the contrary)
So would the proposed $10.10 minimum diminish employment opportunities for unskilled workers? Maybe not in the short-term but if it proves to be substantially higher than equilibrium (and it appears to me that this is the case), we can expect problems down the road.
If it were as simple as passing a law, how about raising the minimum wage to $1,000 per hour and we will all be driving Rolls Royces and living in beach front mansions J
For more about the minimum wage see: http://www.thebigquestions.com/2013/02/18/thoughts-on-the-minimum-wage/
For current minimum wage demographics, see the video below:
