Lately, the minimum wage debate cycle is on an upward trajectory again. One argument, or rather one particular way of making an argument, I keep coming across is the reference to ‘econ 101 wisdom’ on the effects of (raising) the minimum wage.
According to the introductory textbook model, an effective price floor in the labor market leads to an excess quantity of labor supplied. Or, shorter and less technical, minimum wages create unemployment. For some of the opponents of labor market regulation this pretty much settles the debate. Critiques are told to review a model that every sophomore has seen on an exam.
What’s missing in this story is the scope of the model. Which factors does it take into account and which does it ignore? What does the model tell you, what can it not tell you?
Apparently, it’s easier to remember the excess supply in the graph than the key assumption behind the model: everything else constant (ceteris paribus). For better or worse, this assumption allows (micro)economists to come up with clear predictions about how interventions in markets will effect prices and quantities.
Once you allow for other things to change – which is usually what goes on in the world – nothing is quite as certain anymore. David Ruccio summarizes the same point, if you allow for an increase in wages (income) to have an effect on the demand for labor, it is possible for the labor market to clear at the minimum wage.
All of the above arguments operate in the realm of theoretical models. With respect to the actual impact of changes in the minimum wage, it’s best do consider the available empirical data. The Intelligence Squared podcast on this issue includes an interesting discussion of some of these studies.
It also turns out that the teams arguing for and against the motion ‘Abolish the minimum wage’ are really both in favor of having a price floor in the labor market. Their disagreement mainly concerns the question about the optimal level.
With the the presidential election being just around the corner one year away, I have a feeling that the minimum wage debate has a long way to go before it peaks.