Higher Minimum Wage "Not Always Bad". Economists Beset by Theory?

The Economist August 15th, 2020 pp61-62. Economics brief | Minimum wages “Raising the floor” “What harm do minimum wages do?” “Three decades of research have led to a major rethink”




Facts

Between 2000-2018 Minimum wage as % of median wage has fallen, in order of most decline to least decline, in Ireland, Netherlands, Australia and United States and increased, in order of least increase to most increase, in South Korea, Turkey, Portugal, Britain, Poland, Canada, Japan and Spain.

The first American Federal Minimum Wage was instituted in 1968 and in the following 20 years, “fell in real terms by 44%.

Summary

You might not have guessed that in 1992, 79% of American Economic Association (AEA) members, “considered minimum wages to be harmful.” The assumption being that if minimum wages were correctly set then raising the floor would result in organizations on the whole reducing the number of jobs. This because profits margins would be squeezed and in manufacturing foreign competitors, operating with lower wages, could beat the competition on price. This would lead to fewer jobs low-skilled jobs or more automation. Such a case can’t be made for markets like restaurants where there is not international or even interstate competition. Plus restaurants, operating under the same minimum wage, can raise prices or reduce their profit margins to compensate. Over the years, with many studies and data sets having been examined there is no consistent support that nominal wage increases lead to fewer jobs. In fact, raising wages in some cases led to higher employment as job-seekers previously staying-on-the-sideline, when wages were too low, joined the workforce if and when the wage was compelling.

“In competitive sectors, such as fast food, research has found that a 10% increase in wage floor pushes burger prices by just 0.9%. In 2019, one study found “no impact on grocery prices from big [wage] increases.” “As of 2000 only 46% of AEA members were certain that a minimum wage increased unemployment among the young and unskilled.” Now, “Economists no longer think higher minimum wages are always bad.” Some feel that the impact of the increases will eventually be “eroded by inflation". If the wage increases have a permanent effect then some believe “it could encourage [firms] to automate more and decrease employment growth in the future.”

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