Archive for September 19th, 2014

September 19, 2014

How does an increase in minimum wage affect employment figures?

by Grace

Economics professor Mark J. Perry explains a discrepancy seen in the debate on how increasing minimum wage affects existing employment figures.

… Most of the minimum wage debate centers on the issue of whether minimum wage increases have any effects on employment levels. Specifically, does the empirical evidence point to any significantly negative effects on employment levels following minimum wage hikes, as clearly predicted by economy theory? Some empirical evidence like the much-cited 1994 study by Card and Krueger found “no indication that the rise in the minimum wage reduced employment” at fast-food restaurants in New Jersey following a minimum wage increase to $5.05 per hour compared to nearby fast-food restaurants in Pennsylvania where the minimum wage remained constant at $4.25.

While then number of workers may not decline, the “number of unskilled work hours demanded by employers” does decrease.

Bottom Line: It’s more accurate to say that the Law of Demand predicts: a) a negative relationship between higher wages and the number of hours of unskilled work demanded by employers, rather than b) a negative relationship between higher wages and the number of unskilled workers employed. Therefore, it’s possible that a minimum wage hike won’t always negatively affect employment levels for entry-level unskilled workers, but will affect the number of hours demanded by employers for unskilled labor. That’s how we can reconcile the apparent inconsistency between economic theory and some of the empirical evidence…..

Other considerations factor into what actually happens when the minimum wage is increased, so results cannot be accurately predicted.  More details can be found by reading a section of Chapter 10 in Microeconomics: Theory Through Applications, v. 1.0 by Russell Cooper and A. Andrew John.

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Mark J. Perry, “The Law of Demand and the minimum wage: It applies to number of hours worked, not the level of employment”, Carpe Diem, September 14, 2014.

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