Saturday, November 24, 2012

Minimum wage doesn't destroy jobs!

What a change!

In one of most revisionist texts on economics yet, the Economist argues that minimum wages do not necessarily destroy jobs based on a number of studies for the US and the UK. It goes on to say that "today the consensus is that Britain’s minimum wage has done little or no harm".

Most surprisingly, there is evidence that in the UK the minimum wage "not only pushed up pay for the bottom 5% of workers, but it also seems to have boosted earnings further up the income scale—and thus reduced wage inequality". Wow!

The article concludes by saying that:

"This new evidence leaves economists with lots of unanswered questions. What exactly is going on in labour markets if minimum wages do not hurt employment but reduce wage gaps? Are firms cutting costs by squeezing wages elsewhere? Are they improving the productivity of the lowest-wage workers? Some of the newest studies suggest firms employ a variety of strategies to deal with a higher minimum wage, from modestly raising prices to saving money from lower turnover.

Policymakers face practical issues. Bastions of orthodoxy, such as the OECD, a rich-country think-tank, and the International Monetary Fund, now assert that a moderate minimum wage probably does not do much harm and may do some good. Their definition of moderate is 30-40% of the median wage. Britain’s experience suggests it might even be a bit higher. The success of the Low Pay Commission points to the importance of technocrats rather than politicians setting wage floors. Britain’s small, regular changes may be easier for firms to absorb than America’s infrequent but hefty minimum-wage increases. Whatever their flaws, minimum wages are here to stay."

Background papers are here:

"Minimum wage channels of adjustment", by Barry T. Hirsch, Bruce E. Kaufman and Tetyana Zelenska, IZA Discussion Paper No 6132, November 2011
"Minimum wages and wage inequality: Some theory and an application to the UK", by Tim Butcher, Richard Dickens and Alan Manning, October 2012
"Why has the British national minimum wage had little or no impact on employment?", by David Metcalf, CEP Discussion Paper No 781, April 2007
"Minimum wage effects across state borders: estimates using contiguous counties", by Arindrajit Dube, T. William Lester and Michael Reich, The Review of Economics and Statistics, November 2010
"Minimum wage: Maximum impact", by Alan Manning, Resolution Foundation, April 2012
"Revising the minimum wage-employment debate: Throwing out the baby with the bathwater?", by David Neumark, J.M. Ian Salas and William Wascher, forthcoming
"Do minimum wages really reduce teen employment? Accounting for heterogeneity and selectivity in state panel data", by Sylvia A. Allegretto, Arindrajit Dube and Michael Reich, Industrial Relations, April 2011

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