Friday, July 28, 2006

Minimum Wages

Greg Mankiw's post on the minimum wage today illustrates how most Republicans respond to calls for an increase. As with most economic research, there are contradictory findings. Mankiw and others make a simple supply and demand argument: raise the price of X and people will demand less of X. In this case, make poor labor more expensive, and employers should hire fewer low skilled workers. There is another theoretical argument that employers have market power and pay workers less than they deserve. The empirical evidence suggests that there is little to worry about:
[W]e find no evidence for a large negative employment effect of higher minimum wages. Even in the earlier literature, however, the magnitude of the predicted employment losses from a much higher minimum wage would be small: the evidence at hand is relevant only for a moderate range of minimum wages, such as those that prevailed in the U.S. labor market during the past few decades. Within this range, however, there is little reason to believe that increases in the minimum wage will generate large employment losses.
~David Card and Alan B. Krueger, Myth and Measurement: The New Economics of the Minimum Wage, (Princeton: Princeton University Press, 1995, p. 393).

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